Global funds are pulling money out of Asian emerging equity markets at the fastest clip in nearly four years. Data compiled by Bloomberg show that global fund managers net sold about $11 billion in developing Asian stocks excluding China this week, on track for the largest weekly outflow since March 2022. South Korea saw $1.6 billion in net selling, while India lost roughly $1.3 billion. The exodus, combined with a sharp drop in risk appetite, triggered a regional rout.
The MSCI Asia Pacific Index tumbled more than 6% for the week, poised for its biggest weekly decline in six years and the widest underperformance relative to the S&P 500 since April. South Korea's Kospi index suffered a record single-day drop, and multiple trading halts were triggered in some markets.
Iran Conflict Sparks Flight, Reversing 'Sell US, Buy Asia' Bet
Morgan Stanley strategists turned more cautious on Asian and emerging-market equities due to Iran war risks, downgrading India and the United Arab Emirates to neutral from overweight. They said Asia is "heavily reliant on Middle East crude, refined products and LNG supply" and that the market has underestimated supply-chain risks. This week's outflow marks a reversal of the once-popular "sell US, buy Asia" trade, which had bet on a weaker dollar, benign inflation, and AI-driven demand for regional chip stocks. Gary Tan, portfolio manager at Allspring Global Investments, said investors had bought Asian stocks based on expectations of "a weaker dollar and benign inflation," but the Iran situation has challenged both assumptions as the market now weighs prolonged dollar strength and the risk of higher oil prices reigniting inflation.
Asia's High Energy Dependence Magnifies Oil Sensitivity
A deeper reason for Asia's sharper selloff is its relatively high dependence on Middle Eastern crude. Much of the region's fuel imports must pass through the Strait of Hormuz, a critical chokepoint. Escalation of the conflict has driven up supply-chain risk premiums. Rising oil prices have stoked fears of a resurgence in inflation, just as many central banks were gaining confidence that price pressures were cooling. Economies including Japan, South Korea, India and Indonesia are among the world's largest crude importers, while the US has become a net exporter. This divergence reinforces the view that Asia, as a net-importing region, is more vulnerable to inflation and policy constraints under an oil-price shock.
Currency and Equity Rout in Tandem; Volatility, Deleveraging Risks Rise
Safe-haven demand pushed the dollar higher, weighing on emerging-market currencies, with particular attention on net oil importers' currencies and their domestic inflation implications. South Korea's won posted its biggest single-day closing decline since 2009 on Tuesday, and investors are on guard against forced deleveraging and liquidation risks. Meanwhile, volatility gauges are spiking: JPMorgan's emerging-market FX volatility index rose above its G7 counterpart this week, ending a record stretch where it had stayed below G7 levels, signaling a rapid repricing of risk.
Institutions Adjust Positions: Morgan Stanley Goes Defensive, Citi Awaits Stability
On the strategic front, Morgan Stanley maintained a defensive stance, cutting India and the UAE to neutral from overweight while raising Saudi Arabia to neutral from underweight. Daniel Blake and Jonathan Garner wrote in a note that Asia is "heavily reliant on Middle East crude, refined products and LNG supply" and that supply-chain risks are underpriced. Citi emphasized timing: strategists led by Luis Costa said they had "significantly reduced risk exposure over the past few days" but would look to rebuild EM long positions if signs of stabilization emerge. While oil prices show "preliminary signs of stabilization," they cautioned it is too early to say whether crude will repeat its 2022 trajectory. Beyond the Middle East, investors will also watch the upcoming US nonfarm payrolls data for clues on the Fed's rate path. The re-pricing of dollar strength and global risk appetite will determine whether this Asia "exit trade" is a temporary wobble or a more durable portfolio rebalancing.