By Gaurav Dogra and Patturaja Murugaboopathy
(Reuters) - Asian equities attracted their biggest inflows in seven years in 2023, encouraged by major central banks' deceleration in rate hikes to prioritize economic stimulation amid diminishing inflation worries.
Central banks only moderated the pace of their rate hikes last year, but this year analysts anticipate increased foreign inflows into regional equities as the potential for U.S. rate cuts enhance the appeal of risk assets.
According to stock exchange data from Taiwan, South Korea, India, Indonesia, the Philippines, Thailand and Vietnam, foreign investors bought a net $26.62 billion worth of stocks last year, the most since 2016.
Indian equities had the greatest inflows last year, attracting a net $20.74 billion in foreign purchases, the most since 2020. South Korean and Taiwan stocks received $10.12 billion and $3.45 billion in foreign inflows respectively.
Meanwhile, Indonesia, the Philippines, Vietnam and Thailand all saw net outflows. Foreign investors took the most money out of Thai equities at more than $5 billion.
In December, though, these same seven Asian stock markets attracted about $12.59 billion in net foreign investments, the most since November 2022.
"The additional foreign inflow in December is largely a reflection of global investors anticipating a relatively aggressive Fed rate cut scenario for 2024," said Jason Lui, Asia Pacific Equity and Derivative Strategist at BNP Paribas (OTC:BNPQY).
"For example, the latest Fed fund futures pricing suggests that investors are pricing in a relatively high probability of the Fed to start cutting interest rate in March 2024."
However, after rising 4.4% in December, the MSCI Asia-Pacific index has dipped about 2% in the first week of 2024 amid concerns that expectations for early rate cuts might be premature.
"There could be some volatility in foreign fund flows in Q1 2024 as investors try to decide on the exact timing of the Fed rate cut cycle as well as the magnitude of the economic slowdown in the US," said BNP Paribas' Lui.
IG's market strategist, Yeap Jun Rong, noted that while current extreme bullish sentiments in risk markets may prompt near-term profit-taking, a sustained upward trend in equities is likely as long as economic data continues to show softening inflation and a lukewarm growth environment.