Funds grow wary, selling out of Asia’s $4tn stock surge

Asian equities have been on a tear this year, but fund investors are getting cautious. For the second straight week, Asia ex-Japan equity funds saw the largest cash outflows among major regional groups in the period ended April 3, according to an EPFR Global newsletter dated April 5. That happened as the MSCI Asia Pacific Index extended its rise, reaching levels not seen in six months.

A dovish tilt in central banks, hopes for a US-China trade deal and Shanghai’s 30% stockmarket surge have helped Asian equities regain $4tn in value this year, with the regional benchmark climbing 11% to erase most of its 2018 loss. But as concerns about the strength in the global economy grow, investors remain wary.

“The focus will be on a sharp slowdown in growth in 2020, with the prospect of several major developed economies facing a recession or recession-like growth by the middle of 2020,” said Paul Kitney, chief strategist for Asia Pacific equity research at Daiwa Capital Markets Hong Kong Ltd “I think we are into the last quarter of this rally.”

Hong Kong got particularly hit, with equity funds in the last week having their biggest outflows since June 2013, the EPFR data show. That’s even as the city’s Hang Seng Index entered a bull market, recovering completely from the rout that burned investors last year.

China’s major indexes also entered bull markets earlier this year, with the mainland’s stocks going from some of the world’s worst in 2018 to the best now. Investors expect more inflows due to a bigger weighting on MSCI Inc’s gauges, progress in trade talks and policies to boost the equity market and economy.

Still, Morgan Stanley strategists led by Laura Wang say they’re watching for “potential sentiment overshooting” as the market now gets closer to their target price, they wrote in an April 7 note, adding they remain overweight on A shares. Chinese equity funds were among those that saw the biggest outflows in the first quarter, according to EPFR.

While Japan – one of the lagging developed markets this year – had inflows in the past three months, the $1.5bn in buying was much smaller than the more than $38bn to start 2018, EPFR said.

The latest data show the nation’s funds saw a seventh week of withdrawals in eight. The benchmark Topix index has underperformed the MSCI Asia Pacific Index as factors such as the trade war and sputtering global economy weighed on investor sentiment.

Asia isn’t alone in seeing redemptions despite a rally: US equity funds posted their third consecutive weekly outflow and 16th of the past 18 weeks, even as the S&P 500 Index completed its biggest first-quarter gain since 1998.