Listen, folks have been selling Asian equities, ok?
And the reason is clear: everyone is worried about the potential for trade frictions to undermine an otherwise decent investment case.
Simply put: When you’re staring down a potential rewrite of the rules around global trade and commerce, the default mentality seems to be “sell first, ask questions later”.
Let’s put some numbers on it. The MSCI Asia Pacific index is down nearly 13% since its January peak:
Meanwhile, mainland shares in China fell to their lowest levels since March 1, 2016, on Monday, and are of course mired in a bear market having underperformed pretty much everything this year with the exception of Argentine shares:
Again, the catalyst here is obviously trade worries, but Fed tightening, a stronger dollar and the distinct possibility that we’ve definitively transitioned away from the “synchronous global growth” meme that prevailed in 2017 to a strictly U.S.-centric growth story are all adding to investor consternation.
So just how worried are foreign investors about the prospects for Asian stocks? Well, pretty damn worried, according to a new note from Goldman, which uses exchange-level data on foreign flows for the seven EM Asian markets to estimate the magnitude of the foreign money exodus.
Specifically, outflows since the January peak are (almost) unprecedented outside of the crisis. Here’s Goldman:
Current FII selling of US$34bn since the January peak in EM Asian equities is the 3rd largest selling since 2002, next only to selling during the 2008 global financial crisis (US$93bn) and the 2H 2015 China crash.
It’s also noteworthy that EM Asian markets only saw US$17bn of selling during the 2013 ‘taper tantrum’, which is half the current amount of selling, even though macro vulnerabilities are much lower now than during the 2013 taper tantrum, as we recently noted. Current outflows are also larger than the US$25bn in outflows we saw during the 2011 EU debt crisis.
How does that line up with previous inflows? That is, sure, folks have been selling, but is it material in the context of how much money has come in?
In short: Yes.
Specifically, Goldman says “current FII selling has wiped out 14 months of prior inflows, which is the 2nd largest amount after the 2008 financial crisis (which took out 44 months of prior inflows) [and] to put it in context, outflows during the 2H 2015 China market crash took out 12 months of prior inflows.”
So is there any good news here?
Sure. Anytime you get that kind of de-risking, positioning comes away cleaner and Goldman also reminds you that as a percentage of market cap, current outflows “look less extreme and [are] largely in line with previous averages given markets have become bigger and deeper in the past 10-15 years.”
Additionally, the bank notes that Asia-focused funds now have relatively high cash balances, mutual funds are under-exposed to the region and sentiment suggests conditions are now oversold:
Is it time to “bargain” hunt?
I don’t know, maybe ask the (figurative and literal) “man in the middle”…