Foreigners trimmed their holdings in Asian equities in the first week of the month, as regional markets were enveloped in a broad global equities sell-off and surging volatility in the wake of rising U.S. bond yields.
Exchange data showed, foreigners sold about $2 billion in South Korean equities and $1.3 billion in Taiwan equities so far this month. Indonesia, Philippine and Thailand markets also saw outflows in that period.
The sell-off was triggered by a sharp rise in U.S. bond yields following Friday's data that showed U.S. wages increasing at the fastest pace since 2009, raising the alarm about higher inflation and with it potentially higher interest rates. The 10-year U.S. Treasuries yield dropped to 2.7659 on Wednesday in Asian hours after rising to a four-year high of 2.885 earlier this week.
Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong, said flows into Asia financial assets depend on U.S. financial conditions such as S&P returns, the CBOE Volatility index (VIX) and credit spreads.
"Financial conditions in the U.S. are going to be more challenging than last year given higher volatility, the S&P risk (especially if US-Treasury resumes their rise) and the risk of credit spread widening," Benzimra said. The CBOE Volatility index, the closely followed "fear-index" measure of expected near-term stock market volatility, jumped to a 2-1/2 year high of 37.32 on Tuesday. It was last trading at 29.98.
However, some analysts said the sharp equities fall of the past few days doesn't portend the start of a bear market as economic fundamentals and corporate earnings in the region remain strong. Thomson Reuters data, available for 28 percent of Asian companies which reported earnings, showed their net profits beat analysts' estimates by 6 percent on average in the fourth quarter of 2017.
A DBS report said the current bout of consolidation presents an opportunity to gain exposure to Asia for longer-term investors. "The current market turmoil is similar to other mid-cycle correlations seen in recent years and such pull backs have previously coincided with sharp spikes on the CBOE Volatility Index (VIX) before rationality returns," the DBS report said. Asian shares' forward 12-month P/E was trading at 14.22 at the end of January, much cheaper than that of the United States at 18.87 and 17.1 globally.
Exchange data for January showed foreigners invested about $7 billion in Asian equities last month, the highest inflows since March 2017. Taiwan, India and South Korea led the regional flows last month.