Global investments are starting to flow into Asian equities again after a sharp sell-off as low valuations, weaker currencies and improving export markets lure funds back.
Investors who fled Asian share markets earlier this year are more hopeful that China will avoid a hard landing as central banks in Europe and Japan maintain accommodative monetary policies, supporting recovering global growth.
Emerging markets are showing early signs of revival with foreign fund inflows picking up over three weeks in October, led by Asia. Foreign investors also bought $2.7 billion of stocks in Asia, ex-China and Malaysia, in October compared with sales of $23 billion over the prior four months, Credit Suisse data show.
"It's more that people are reducing negative views, rather than going positive. But it always starts like that," said Josh Crabb, head of Asian equities at Old Mutual Global Investors in Hong Kong. "If it keeps going, people turn from being less negative to turning bullish. But it won't be a straight ride."
With Chinese equities clocking the fastest growth among major Asian markets in October, investors returned to Chinese exchange-traded funds (ETFs), which accounted for most of the inflows over the past three weeks.
China is still recovering from a bloodbath in its equities markets over the summer, but the worst may be over. Economic growth likely bottomed in the third quarter, John William Huia Woods, Asia-Pacific chief investment officer at Credit Suisse, said in a report.
Investors are also returning to South Korea and Taiwan, where valuations remain near 2008 lows, and to India, lured by its growth prospects.
"Interest in emerging markets and Asia has picked up recently, likely due to Chinese economic data showing some signs of stabilisation," said Andrew Jones, portfolio manager for emerging market equities at PineBridge in New York.
But foreign investors continued to sell shares in Indonesia and the Philippines in October, according to Credit Suisse data. Malaysia also saw selling over the five months through September.
Currency weakness and falls in commodities prices are set to weigh on companies in Malaysia and Indonesia in 2016.
An anticipated rate hike by the Federal Reserve in December could renew pressure on risk assets, but Asian export-reliant economies should benefit from a stronger U.S. economy.
FUND FLOWS RECOVER
Asian ETFs received $1 billion versus $50 million into Europe, the Middle East and Africa, and $14 million into Latin America, in the week to Oct. 14, according to Citi. And Asia received around $1 billion more over the subsequent two weeks.
The MSCI Emerging Markets Asia index .MIMS00000PUS, which plummeted 28 percent between an April peak and August trough on fears over China's slowing economy and volatile markets, has since recovered 12 percent.
The MSCI Asia ex-Japan index was trading at 1.305 times book value as of Sept. 30, the cheapest since the global financial crisis, DataStream figures show.
Investors including the Templeton Emerging Markets fund and Pinebridge Capital's Global Emerging Markets Focus Equity fund have selectively increased their Asia weightings.
Credit Suisse's wealth management unit raised Asian emerging markets to "outperform" in October. The investment bank raised South Korea to "overweight" due to cheap valuations and rising returns on equity across various sectors.
The KOSPI .KS11, at 1.25 times book value, is Asia's cheapest major emerging market index. South Korea benefits from cheaper commodity imports and some companies will gain from growing Chinese consumption, PineBridge's Jones said.
PineBridge's Asia weighting rose largely on an increase in its South Korean allocation, to 17.7 percent in September, from 13.1 percent in June.
The Templeton fund's Asia weighting climbed to almost 57 percent as of Sept. 30, from 52 percent in June, on increased exposure to India, Taiwan and South Korea.
India, while expensive at 3.1 times book value, is expected to see stronger growth than China and the United States, according to Franklin Templeton.
"After a tough year, Asia looks cheap compared to Europe and the U.S.," Hugh Young, managing director of Aberdeen Asset Management in Singapore, said in a note.
"After every 'crisis' in this region, a long period of growth has followed. Asia's promise has not diminished."
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