Asian equities saw sustained foreign selling in May for the fourth straight month as a firmer dollar and political tensions in Italy kept overseas investors away from regional assets. Foreigners sold about $4 billion worth of Asian stocks last month to take this year's tally to over $15 billion, data from seven stock exchanges showed. That compares with about $20 billion of inflows in the entire year of 2017.
"The outflows are happening because opportunities are opening up elsewhere, especially in the US," said Greg McKenna, Chief Market Strategist at AxiTrader. Federal Reserve tightening, rising bond yields, and a strengthening dollar have "all combined to put pressure on EM nations," McKenna said. Political uncertainty in Italy added to the woes of regional markets, already hit by a surge in the dollar and concerns about US protectionist trade policies.
At the end of last week, Italy's anti-establishment parties formed a coalition government, helping to avert potentially destabilising snap elections that could have turned into a referendum on the country's membership of the European Union. Thailand saw $1.6 billion of foreign outflows in the last month - the biggest in the region - followed by India and Taiwan.
CGS-CIMB analysts believe there would be limited further foreign selling pressure as their aggregate holding in Thai equities is now only 30.1 percent, one of the lowest rates in a decade. Investors turned cautious on Indian markets after Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) fell short of the required number of seats to form a government in the southern state of Karnataka. India faces national elections in 2019 and the Karnataka election was seen as a litmus test for Modi's party.
Overall, analysts said monetary tightening by major central banks will continue to weigh on Asian markets in coming months. The US central bank is expected to raise its policy rate for the second time this year next week, while expectations have increased that Europe's massive monetary stimulus was nearing an end. On Wednesday, the European Central Bank's chief economist said the central bank will debate whether to end bond purchases later this year, a hawkish message which hit emerging markets.
The Fed looks set to continue to tighten its balance sheet by cutting back on bond purchases in the year ahead, said AxiTrader's McKenna. "The pressure looks set to remain on EM currencies while the confluence of a strong US economy drives the Fed Funds rate and the US dollar higher."