S-E Asia's loss is North Asia's gain
ALONGSIDE the great rotation from bonds to equities and from emerging to developed markets that has been 2013's overriding investment theme, Asia is seeing its own migration in portfolio flows: from south to north.
Foreign investment flows have lifted stock markets in China, South Korea and Taiwan since last month, the first and tentative signs that investors still see pockets of value at a time when the outlook for emerging markets is glum.
The appeal of these markets comes from several factors.
While the consensus calls are still for an outperformance of equity markets in Japan, the United States and the rest of the developed world, a growing number of investors believe there is scope for Asia's trade-driven, open economies to do well as US growth recovers.
To add to the mix, stock prices have been hammered in China and Korea, based on what some analysts believe are exaggerated perceptions of a collapse in Chinese growth, even as these countries are buffered by huge trade surpluses.
South Korea received foreign portfolio flows totalling US$853 million (S$1.1 billion) in equities last month, reversing part of the heavy outflows in previous months, data collated by BNP Paribas showed.
Foreigners also bought US$2.75 billion of Taiwan equities last month, offsetting sales in June. They sold US$253 million of Indonesian equities and large amounts of bonds and stocks in India.
Data on flows into Chinese shares and bonds is scarce, but the China Enterprises Index of the top Chinese listings in Hong Kong has jumped about 9.5 per cent since the end of June.
"The whole story in Asia is one of rotation," said Mr John Woods, head of Asia fixed income at Citi Investment Management. "What we are seeing in terms of flows is a sharp unwind of South-east Asia and capital inflows into North Asia, particularly Korea and Taiwan."
While analysts have scrambled to cut profit forecasts in Asia, excluding Japan, since February, regional earnings growth over the next year is still expected to outpace that in the US.
Consensus forecasts are for average earnings-per-share increases in the next 12 months of 9.6 per cent in the US, versus 13.5 per cent for emerging Asia, 17.5 for Korea and 18 for Taiwan.
Even China, which has often burned investors, is looking better to some.
"Our view towards China is two-fold in that much of the bad news has been priced in, that valuations are compelling and we're taking a 12- to 18-month view that equity markets in China will be higher," said Mr Woods.
It's more than just valuations that make North Asia attractive for the discerning investor. These countries offer better direct exposure to the pick-up in technology exports that will accompany a US recovery.
Their markets fare better when oil and base-metal prices are lower than do Malaysia and Indonesia, whose markets are heavy on commodity producers.