Funds flee Asia equities in reaction to end of US QE
Asian equities have experienced heavy selling this month, as foreign institutional investors become wary of a probable US rate hike early next year after the US Federal Reserve ends quantitative easing, according to Hongkong and Shanghai Banking Corporati
HSBC is overweight on Indonesia, China and India and underweight on Hong Kong, Thailand, Malaysia and the Philippines.
Net outflow for the region has reached $5.5 billion this month to Monday, with South Korea at $2.1 billion and Taiwan at $1.4 billion witnessing maximum outflows, while India at $0.5 billion has experienced its first outflow since January. Total FII inflows stand at $31 billion year to date for the region.
India has returned to the top position as the most loved market in the region, as mutual funds have reduced their exposure to China equities. Funds have increased their exposure to Thai equities, pushing the Philippines to fourth position in the region.
Rotation from Taiwan to Korea has continued, but funds remain underweight in both these export-heavy markets. Hong Kong is the least loved market in the region.
Global funds have maintained their positive stance on Asia, adding exposure in most Asian markets. Overall, there has been no significant change in ranking from the previous month – Thailand remains the most loved market, followed by China and Korea. Global funds have stayed away from developed Asian markets, maintaining their underweight exposure to Singapore and Hong Kong.
At the sector level, funds have rotated into cyclicals, with a sharp increase in exposure to industrials and materials, pushing consumer staples to third position. The industrials sector is now the most loved in the region. Funds have increased their exposure to healthcare and consumer discretionary, while reducing it in energy and utilities. Financials, telecoms and IT remain the least loved sectors in the region.
Kulaya Tantitemit, executive director of the Macroeconomic Policy Bureau at the Fiscal Policy Office, said the termination of the United States’ quantitative easing (QE) policy was expected and has been priced in by the market, so the effect from the missing cashflow would be minimal.
It is also a sign that the US economy is truly recovering as expected by the US Federal Reserve. The world and Thailand’s economy would benefit from the expected increase in US consumption.
“The differences in timing of differing policies that are expected to be introduced by developed countries next year will contribute to more volatile fund flows.
“The trend of the baht will be on the depreciation side since the US dollar is getting stronger from the expected increase of its benchmark interest rate in the second half of next year,” she said.
Suchart Thanathitiphan, an executive of the Thai Bond Market Association, said the private sector next year is expected to continue issuing bonds while interest rates remain low.
The US is not hurrying to raise interest rates despite the end of QE and the US is expected to delay raising interest rates. This is a positive sign for the cost of funds to companies planning to mobilise capital through debentures. However, there are such outflows from the Thai market, but most are capital outflows from short-term bonds, he said.
From October 1-24, a net Bt16.60 billion of foreign capital left the bond market. Year to date, a net Bt22 billion of foreign capital exited the bond market.
Foreign bond holdings stood at Bt687 billion, of which 14 per cent was in short-term bonds and 86 per cent in long-term bonds.
The returns of Thai bonds are more interesting than those of US bonds, while the US is not expected to increase rates soon. This makes foreign investors continue to move into long-term bonds. The return of long-term bonds this month increased by 0.15-0.20 percentage point, while the return of short-term bonds is stable.
Kangana Chockpisansin, head of macroeconomic research at Kasikorn Research Centre, said outflows from the region including Thailand are not expected to be rapid, since the US Fed did not sent a strong signal on an interest rate hike.
The European Union is still doing quantitative easing to shore up its economy. The EU’s QE might have an indirect impact on the US economy, making the Fed more cautious in raising its rate.
The policy rate of Thailand is expected to stay at 2 per cent. The decision to increase the policy rate in the country will be forced by internal rather the external factors.
