Asia EM Equity Strategy: Capital Flows and Portfolio Guide
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Since early March, Asian and emerging markets have experienced significant outflows of foreign capital. Hedge funds initiated deleveraging in the fourth week of March, with selling activity persisting into the week ending April 3. Data on long-term holdings as of end-February from GEM reveals that Brazil and South Korea are the most overweight regions, while India and Taiwan (excluding TSMC) are the most underweight.
EPFR data for March indicates that active foreign investors net sold $5.3 billion in emerging market equities, while passive inflows slowed to $4.0 billion from February's $31.0 billion. Both active and passive flows shifted to net selling of Chinese equities. From early March to early April, foreign investors net sold $29.3 billion in Taiwan stocks, $23.6 billion in South Korea, $22.9 billion in Japan, $14.2 billion in India, and $1.4 billion in Indonesia.
Hedge fund deleveraging was primarily driven by positions in South Korea and Chinese A-shares, with the technology/semiconductor sector seeing the largest outflows. Despite this, the IT sector's total and net leverage remain at the 100th and 99th percentiles, respectively, since 2010, suggesting some capital may be waiting for a rebound. Following ceasefire news, a rebound is expected in Japan, South Korea, Taiwan, and high-beta emerging markets.
Sector positioning as of end-February shows semiconductors and capital goods as the most overweight industries, while materials and tech hardware are the most underweight. Among individual stocks, SK Hynix, SK Square, Samsung Electronics, CATL, and Credicorp are the most overweight, while Xiaomi, Foxconn, Pinduoduo, China Construction Bank, and Alibaba are the most underweight.