Global funds are withdrawing from Asian emerging market stocks at the fastest pace in nearly four years. An article previously published by Wall Street Insight indicates that Asian markets such as Japan and South Korea heavily rely on oil imports from the Middle East. The escalation of the Iran conflict has triggered risk aversion, forcing investors to reprice risks, which quickly transmitted to the stock and currency markets.
According to data compiled by Bloomberg, global funds net sold approximately $11 billion in developing Asian stocks excluding mainland China this week, which is set to mark the largest single-week outflow since March 2022. Among them, South Korea saw about $1.6 billion, and India about $1.3 billion.
The outflow of funds combined with a sharp drop in risk appetite has led to a sharp decline in regional stock markets. The MSCI Asia-Pacific Index fell more than 6% this week, poised to record the largest single-week decline in nearly six years, and created the largest underperformance relative to the S&amp;P 500 Index since April. The South Korean Kospi Index experienced a record single-day drop, and some markets saw multiple trading suspensions.
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Morgan Stanley strategists have taken a more cautious stance on Asian and emerging market stocks due to risks related to the Iran conflict, downgrading India and the UAE from overweight to neutral, stating that Asia &#34;heavily relies on Middle Eastern crude oil, refined oil, and LNG supplies,&#34; and believes that the market has underestimated the assessment of supply chain risks.
<h2>The reversal of the &#34;Sell America, Buy Asia&#34; trade, with risk reassessment becoming the main theme</h2>
This outflow marks a reversal of a recent high-yield trade, namely &#34;sell America, buy Asia.&#34; This strategy bet on a weaker dollar, moderate inflation, and the AI boom driving demand for regional chip stocks, thus rotating funds from overvalued U.S. stocks to Asian stocks.
However, the situation in Iran has shaken the key premise. Gary Tan, a fund manager at Allspring Global Investments, stated that investors previously bought Asian stocks based on expectations of &#34;a weaker dollar and benign inflation,&#34; but the situation in Iran has challenged both assumptions, and the market is assessing whether a prolonged strong dollar and high oil prices will reignite inflationary pressures.
<h2>Increased sensitivity to oil prices: Asia's dependence on Middle Eastern energy supplies is being repriced</h2>
One reason for the deeper pullback in Asian assets is their relatively high dependence on Middle Eastern crude oil. A large amount of fuel imports must pass through the critical Strait of Hormuz, and the escalation of conflicts has raised the risk premium on supply chains. Rising crude oil prices have intensified concerns about a resurgence of inflation, especially as many central banks have just begun to build confidence in cooling inflation.
Countries such as Japan, South Korea, India, and Indonesia rank among the world's largest crude oil importers, while the United States has become a net exporter of crude oil. This difference reinforces the market's judgment that Asia, as a &#34;net importing region,&#34; is more susceptible to inflation and policy constraints under the impact of rising oil prices
<h2>Stock and Currency Linked Decline, Volatility and Deleveraging Concerns Rise</h2>
Driven by risk-averse trading, the US dollar strengthened, suppressing emerging market currencies. The market is particularly focused on the currencies of net oil-importing countries and their impact on domestic inflation. The South Korean won recorded its largest single-day closing drop since 2009 on Tuesday, as investors remain wary of passive deleveraging and forced liquidation risks.
Meanwhile, the volatility index is on the rise. The JP Morgan Emerging Markets FX Volatility Index surged this week to levels above comparable G7 indicators, ending a record period of being &#34;below G7&#34; for an extended time, highlighting that market risk pricing is rapidly shifting.
<h2>Institutional Position Adjustments: Morgan Stanley Shifts to Defensive, Citigroup Awaits Stability Signals</h2>
On the strategic front, Morgan Stanley strategists have adopted a more cautious stance on Asian and emerging market equities due to risks related to the Iran conflict, downgrading India and the UAE from overweight to neutral, while upgrading Saudi Arabia from underweight to neutral.
Daniel Blake and Jonathan Garner stated in their report, &#34;We remain defensive,&#34; noting that Asia &#34;heavily relies on Middle Eastern crude oil, refined oil, and LNG supplies,&#34; believing that the market is underestimating supply chain risk assessments.
Citigroup emphasized rhythm management. Luis Costa and others mentioned in their report that they have significantly reduced risk exposure over the past few days, but if stability signs emerge, they still hope to re-establish long positions in emerging markets; although there are &#34;initial signs of stabilization&#34; in oil prices, it is still too early to assert that oil prices will repeat the trends of 2022.
In addition to the Middle East situation, investors will also focus on the US non-farm payroll data tonight for clues on the Federal Reserve's interest rate path. The repricing of the US dollar's strength and global risk appetite may still determine whether this round of &#34;withdrawal trading&#34; in Asian assets is a phase of volatility or a more enduring repositioning

IEMG

The escalation of the situation in Iran has triggered a flight to safety, with global funds withdrawing from Asian emerging markets at the fastest pace in four years, with a net outflow of approximately $11 billion this week. Due to Asia's heavy reliance on Middle Eastern energy, rising oil prices threaten the inflation outlook, leading to a reversal of the "sell U.S. buy Asia" trade, causing the MSCI Asia-Pacific Index to record its largest single-week decline in six years. Institutions such as Morgan Stanley have shifted to a defensive stance, downgrading ratings for countries like India. Under the dual pressure of stock and currency declines and deleveraging, the market is re-pricing the supply chain risk premium of Asian assets

- Global funds are withdrawing from Asian emerging market stocks at the fastest pace in four years, with approximately $11 billion sold this week alone.  
- This outflow, driven by heightened risk aversion due to the escalating Iran conflict, has led to a substantial drop in regional stock markets, notably a 6% decline in the MSCI Asia-Pacific Index.  
- Analysts have adjusted their outlooks, with Morgan Stanley adopting a cautious stance on Asian equities, reflecting concerns over reliance on Middle Eastern oil amidst rising supply chain risks.

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Global funds accelerate withdrawal from Asia, with a weekly sell-off of $11 billion, the highest in four years