13.7 billion USD pullout from Asia stock markets

Foreign funds scale of buying Asia region stocks have been shrinking. At the same time, Asia markets bond issues are slowing down.

Recently, most institutions data shows that because of the global economic slow down and lesser risks investors willing to take, Asia's stock markets are facing a net outflow of funds, and the scale can even get greater. The withdrawal of funds from the stock market may also indicate that funds withdrawal may spread to other areas such as FDIs and loan capitals.

Asia Stock Markets Encounter Net Fund Outflow

One of the 3 leading global rating agencies, Fitch Ratings data shows that foreign funds are decreasing their investments in Asia stock markets. In the first 6 months of this year, the net selling of Asia stocks is worth up to 13.7 billion USD, the highest since June 2001. The outflow scale is even larger than the 2001 tech bubble burst and 2003 SARS outbreak. The worst hit is Taiwan as because in Taiwan, foreign funds has large holdings in its stock market and a high ratio of it is in the electronics industry related stocks.

HSBC recently did a survey with various big funds and the results show that in Asia Pacific region (not including Japan) for 2Q 2008, the recorded net fund outflow ratio of equity funds as compared to that of funds that managed stocks for its clients is 20%. But in 1Q there was a 6% inflow. In Japan, the ratio for the same period was 10% and 8% for 1Q.

The survery was done by HSBC with the 12 global leading fund companies. The survey results show that in the end of 2Q this year, the 12 fund companies have a total of 4.2 trillion USD put up by clients for management, equivalent to 17% of all the global fund companies total holdings. The survey results also shows that in 2Q this year, net fund outflow reached an estimated 28.5 billion USD. Comparing to 1Q, the total fund size went down by 0.67%.

A wealth management supervisor from HSBC Hong Kong's personal financial services department says that the net fund outflow from the stock market in 2Q shows that investors are concerned about the inflation problem in Asia and the slowing down of the Asian economies. Investors continues to take a more prudent investment strategy and pulled the funds out from the volatile stock markets and transfer them to bonds or cash.

Coming 2 Quarters - High Fund Outflow Dangerous Period

Looking forward, institutions are not optimistic about the Asia stock markets.

The survey results by HSBC shows that fund managers in general does not see the stock market performing in 3Q of 2008 in the Asia Pacific region (not including Japan). The survey results also shows that funds have started holding cash and bonds. When asked about the outlook of the 2008 3Q Asian stock market, 22% of the fund managers thinks that in 3Q they will reduce stock holdings of Asian stock markets not including Japan. This ratio was zero during 2008 2Q. In 2Q, 56% of the fund managers increased such holdings and in 3Q only 44% mentioned that they were preparing to increase their holdings.

Bank of China Hong Kong recently also announced their research report saying that the expectations for countries economic slowdown and global recession have increased. This makes funds more sensitive. After Europe and Japan, the effect of the economic slowdown from the developed countries to the developing countries will be more prominent. If that were to be the case, global funds may pull out in big scale from those regions. According to the general trend that developing countries economic cycles are generally lagging behind the developed countries, in the coming 1 to 2 quarters, it is in a high danger period were funds will most likely pull out from developing countries.

Stock Market Fund Movements Indicates Overall Slowdown in Capital Inflows

Fitch Ratings says that as global investors continues to strengthen their sense on risk aversion, the decline of the region's economic fundamentals and the worsening of the global financial situation, Asia Pacific region fund inflow starts to slow down.

Fitch Ratings report also says that altough in January 2008 Asia Pacific region has received strong FDI and is still able to get international cross-border loans from major banks, but scales of foreign funds buying into the Asia Pacific region stock market have been declining and at the same time global issue of funds have slowed down.

Franklin Poon, director at Fitch's sovereign group says that there will be sharp fluctuations of fund flows in the market and that they have started to question the thought about the decoupling of Asia. The changes in the movement of sensitive funds could be indications beforehand of the FDIs and loan capital movements.

Fitch Ratings has continous trackings on 4 types of faster movements fund inflow situations on FDIs inflows, foerign funds buying into local stock market scales, outside positions of foreign banks in Asian countries and bonds issued overseas.

Fitch Ratings mentioned that in 1Q 2008, there are no signs of weakening of FDI in Asia Pacific region. In capital inport economies, China, India, Thailand, Indonesia and Phillipines, FDIs net inflow are still stable. In capital export economies, Hong Kong, South Korea, Malaysia and Taiwan, FDIs net outflow also does not show major signs of decline.

As for international inter-bank lending, Asia is still a net creditor of international banks. Fitch Ratings thinks that under the circumstance that the official foreign exchange reserves continues to increase, Asia regions foreign assets will continue to rise and the region's credit risks will still be in a controllable region. At the same time, international banks continues to increase their loan issues in Asia. Fitch Ratings currently is especially concerned with India and South Korea. The two countries net international bank loans are increasing too fast, the deposits in the international banks cannot match it.

In 1Q 2008, Asia Pacific region's international bond issue scale has shrunk with net issue size dropping 47% to 5 billion USD. The biggest drop were in Hong Kong and Singapore. The 2 places are the region's financial centres and so is the most sensitive to global capital market's development. Malaysia, Thailand and India's country bonds issues are also dropping in scale.