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GRAPHIC-Foreign flows into Asian equities fall for the first time in 2017

Published 07/08/2017, 05:46 pm
Updated 07/08/2017, 05:50 pm
GRAPHIC-Foreign flows into Asian equities fall for the first time in 2017
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By Patturaja Murugaboopathy

Aug 7 (Reuters) - Foreign investors sold Asian equities in July, ending a six-month streak of net purchases that helped drive a surge in regional stock markets, but analysts are confident the latest turn doesn't portend a sustained exodus from the region.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS has risen nearly 25 percent so far this year.

July data from seven Asian exchanges including India, Indonesia, and Thailand showed foreign investors' total equity sales in the region exceeded their purchases for the first time this year.

However, analysts believe the pace of sales is unlikely to accelerate, with China's manufacturing sector showing still-solid growth and reduced expectations of a U.S. interest rate hike this year helping to support Asian stocks.

Indonesian equity markets saw net sales of about $800 million, the most in the region. That was followed by South Korea and Thailand, with net sales of $382 million and $197 million respectively.

Indian equities, however, attracted inflows for the sixth consecutive month in July on expectations of easier monetary policy. The Reserve Bank of India cut its main policy rate on August 2, becoming the first Asian central bank to trim rates this year. recent hawkish turn by major central banks such as ECB and BOE, coupled with the expectation of a growth moderation in the second half for Asian markets had likely caused investors' confidence to wane in July, " said Jingyi Pan, market strategist at IG in Singapore, referring to the European Central Bank and the Bank of England.

"However with current supportive conditions, such as the sustained expansion of China's manufacturing sector, an accommodative Fed outlook and a broadly resilient currency market... the likelihood of an acceleration in foreign selling is not high at the moment."

Factory activity in China expanded at the fastest pace in four months in July, giving investors optimism that the global economy can carry momentum through into the second half of the year. other factor in contention is the Federal Reserve. Despite stronger-than-expected jobs growth in June and July, markets are evenly split on the likelihood of another rate hike by the Fed this year as U.S. inflation remains stubbornly low.

A market rally this year has driven up the valuations of Asian shares, which are now trading above their 10-year average.

According to StarMine data, the average forward 12-month price-to-earnings ratio of Asia-Pacific shares stood at 13.3.

But with the average Asian PE still significantly cheaper than Wall Street's 19.1, and the global average of 15.4, analysts say valuations are not behind the slowdown in foreign investments in the region.

"In July there was no clear trend with some value and some growth sectors outperforming, so no evidence of selling due to valuations." said Adrian Mowat, chief Asian and emerging markets equity strategist at J.P. Morgan.

"We remain bullish on Asian equities with overweights in China and South Korea."

South Korea was the cheapest in the region with forward 12-month P/E of 10 according to the data.

With foreign inflows slowing in the last two months, analysts said domestic investors have started to pitch in and support the equity rally.

Domestic flows are accelerating in India, Indonesia, Thailand and in Korea, according to a BNP Paribas (PA:BNPP) report.

The report said the trend of Asian markets being driven more by foreign institutional investors (FII) money than domestic institutional investors (DII) money has started to change over the past 12-15 months, with DII money increasingly important in influencing market movements.

"Remember if foreign investors are selling, the local investors must be buying" said J.P. Morgan's Mowat.

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