Asian shares attracted the biggest inflows in seven years in 2023, helped by a slowdown in major central banks raising rates to prioritize economic stimulus amid waning inflation fears.
Central banks only eased the pace of rate hikes last year, but this year analysts expect increased foreign investment into regional stocks as the potential for a U.S. rate cut increases the appeal of risk assets.
Foreign investors bought a net worth of $26.62 billion in stocks last year, the most since 2016, according to stock exchange data from Taiwan, South Korea, India, Indonesia, the Philippines, Thailand and Vietnam.
Indian stocks were the biggest inflows last year, attracting net foreign purchases of $20.74 billion, the most since 2020. South Korean and Taiwanese stocks received foreign inflows of $10.12 billion and $3.45 billion, respectively.
Meanwhile, Indonesia, the Philippines, Vietnam, and Thailand saw net outflows. Foreign investors took the most money from Thai stocks at more than $5 billion.
However, in December, these seven Asian stock markets attracted $12.59 billion in net foreign investment, the most since November 2022.
Jason Lui, Asia Pacific Equity and Derivative Strategist at BNP Paribas (OTC) mentioned that the increased foreign inflows in December largely reflect global investors anticipating a more aggressive scenario of Fed rate cuts for 2024.
“For example, the most recent Fed funds futures prices suggest that investors are pricing in a relatively high probability that the Fed will start cutting interest rates in March 2024.”
But after rising 4.4% in December, MSCI’s Asia-Pacific index fell about 2% in the first week of 2024 on concerns that expectations of an early rate cut may be premature.
According to BNP Paribas’ Lui, there might be fluctuations in foreign fund flows during Q1 2024 as investors aim to determine both the precise timing of the Fed’s rate-cutting cycle and the extent of the US economic slowdown.
IG market strategist Yeap Jun Rong noted that while the current extremely bullish sentiment in risk markets may prompt short-term profit-taking, a sustained uptrend in stocks is likely if economic data continues to show easing inflation and a tepid growth environment.