Foreign capital withdrawal! Asian stock markets may face the largest outflow since 2009

Middle East conflict triggers surge in oil prices, and emerging Asian markets are experiencing a historic level of foreign capital withdrawal. International investors continue to sell off stocks in Asia that are highly dependent on energy imports, with outflows expected to reach the highest level in 15 years.

According to data compiled by Bloomberg, since the outbreak of the Iran war, foreign investors have sold approximately $52 billion worth of Asian (excluding China) emerging market stocks, potentially setting a new monthly record for outflows since 2009. Markets such as South Korea and India, which rely heavily on oil imports, are among the hardest hit, becoming major areas of sell-off.

Morgan Stanley strategists advised investors last week to reduce holdings during the rebound in Asian stocks, citing ongoing risks of oil supply disruptions in the region. Meanwhile, a strengthening dollar and profit-taking in chip stocks have further deepened the decline in Asian markets, while U.S. stocks remain relatively resilient due to the country’s status as a net energy exporter, leading to a clear divergence in market performance between China and the U.S.

The prospects for a U.S.-Iran ceasefire remain uncertain. The U.S. insists negotiations are ongoing, but Iran has publicly rejected President Trump’s outreach efforts. When foreign capital will return to Asian markets remains highly uncertain.

Outflows Reach Over 15-Year High

This month’s foreign capital exodus has surpassed multiple historical benchmarks, highlighting the severity of the impact.

According to Bloomberg data, outflows from Asian emerging markets this month have not only exceeded those seen in March 2020 during the early days of the COVID-19 pandemic but also more than doubled the levels seen during the Russia-Ukraine conflict in June 2022.

High oil prices cast a shadow over the economic outlook of net energy-importing countries, most of which are concentrated in Asia. South Korea and India, with their high dependence on oil imports, are experiencing concentrated sell-offs, dragging down the entire regional market.

Gary Tan, fund manager at Allspring Global Investments, said, “We may be witnessing a rotation of short-term funds into markets with lower Middle Eastern energy risk exposure, and this trend could continue until the situation in Iran becomes clearer.” He further noted that Asia accounts for about 80% of crude oil passing through the Strait of Hormuz, “so any disruption will have a far greater impact on inflation and growth prospects in the region than elsewhere.”

Asian Markets Underperform U.S. Stocks Amid Multiple Pressures

In this round of correction, Asian stock markets have significantly underperformed U.S. stocks. As a net energy exporter, the U.S. has limited economic impact from rising oil prices, providing a relative buffer for its stock market.

The strengthening dollar and profit-taking in chip stocks have further pressured Asian markets. Morgan Stanley strategists last week recommended investors sell on rallies in Asian stocks, emphasizing the region’s high vulnerability to ongoing oil supply disruptions.

The direction of the Iran situation remains a key variable in whether foreign capital can return to Asia, with limited prospects for clarity in the short term. The U.S. insists diplomatic talks are ongoing, but Iran has publicly rejected Trump’s ceasefire proposals, and negotiations are at an impasse. Gary Tan also stated that until the situation becomes clearer, capital rotation is likely to continue, meaning short-term investor sentiment toward Asian stocks will remain cautious.

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