Tensions in Korea driving EM Asia portfolio outflows: ANZ

September 12, 2017

Portfolio outflows from Asia were recorded during August for the first time this year, with foreign-based investors acting as broad based sellers of equities amounting to USD4 billion, according to an FX Insight report from ANZ Bank.

There was still demand for debt, but at a reduced pace of USD1.7 billion, the report says.

“Heightened geopolitical tensions in the Korean Peninsula were the main driver of the outflows, with Korean markets bearing the brunt of the selling,” ANZ says.

“Further outflows are likely in the event that geopolitical tensions escalate, which will put downward pressure on asset prices in the region.”

ANZ says Asian portfolio assets saw net foreign selling in August of US$2.4 billion for the first time this year, while equity markets saw broad-based selling totalling US$4 billion. This was the second consecutive month of equity outflows.

“The Philippines was the only market not to see equity outflows in the month. Foreign demand for Asian debt remains, but at USD1.7bn has moderated for the fourth straight month.

“Korea saw the largest outflows in the month as geopolitical tensions escalated across the Korean Peninsula. Equity outflows picked up from July to US$1.4 billion, the most since January 2016, while debt outflows were recorded for the first time since December 2016.

“Indian equity markets saw the largest outflow in the month, despite the RBI rate cut on August 2. Debt inflows stayed strong, though this is expected to moderate with FII debt limits close to 100% unless they are raised soon.

“Debt inflows into the Chinese bond market moderated in August following two strong months previously. ETF data suggests equity inflows also moderated in August.

“However, we expect foreign investor sentiment to remain positive on Chinese assets on eased outflow pressures and a strong yuan.”

ANZ says the CNY was the best-performing currency in EM Asia in August.

“Further escalation of geopolitical tensions will result in a continuation of outflows from the region,” the report says.

“So far in September, equity outflows of US$1.6 billion have been recorded following North Korea’s nuclear test early in the month and the likelihood of another missile test soon.

“As tensions are likely to stay high, the risk is that the outflows may also start to spread into the debt market as well, putting downward pressure on asset prices in the region.”  www.live.anz.com (ATI).