Foreign investors remain nervous about the impact of a US economic downturn on Asia and a surprise interest rate cut by the Federal Reserve is insufficient to attract funds back into the region. The Fed cut its federal funds target rate by three-quarters of a percentage point to 3.50 percent on Tuesday.
Sparking a strong rally in stocks and bonds after fears of a US recession had earlier in the week plunged markets to multi-year lows. But investors say the respite will be brief and markets will continue to remain volatile because of a lack of conviction that the Fed's measures will prevent the world's biggest economy from sliding into a recession.
"Markets are not convinced that this is enough for the containment of the US downturn and so they are pricing in more rate cuts down the road," said Ooi Boon Peng, chief investment officer, Asian fixed income for Prudential Asset Management.
Market players expect the Fed to cut interest rates further at the next policy meeting, with short-term interest rate futures showing a roughly 90 percent perceived chance of a 50-basis-point rate cut at the Fed's January 29-30 meeting.
"The fundamental issues are still there - a lot of leverage and a lot of credit issues," said Rachana Mehta, fund manager with DBS Bank, referring to the strain on corporate balance sheets. Asian markets jumped on Wednesday after the rate cut, although most were off the highs late in the day.
"Most of today's rebound appears to be related to short-covering," said Binay Chandgothia, chief investment officer, Principal Asset Management while adding the rate cut would icer with Hang Seng Investment Management, said.
"They are now scaling back their investments overseas, including those emerging markets .. they are now just at the beginning of repatriating funds back into their core market," said the Hong Kong-based fund executive, who overseas about US $10 billion in assets.
South Korea has experienced the biggest overseas sell-off this year among six markets tracked by Japan's Nomura International. Its share index fell by more than 15 percent since the end of 2007 as foreigners sold a net $5.8 billion.
Seoul's benchmark tracks the US economy closely because of the heavy weight of exporters in the index. This is reflected by other indexes in Asia, so many investors have sought domestically focused plays.
Anthony Muh, head of Asia Pacific for AT Asset Management, is upbeat on domestic India and China picks while holding both Bharti Airtel and China Mobile. He is also overweight Hong Kong property firms such as Hang Lung Properties and Sun Hung Kai Properties Ltd.