Fears in Asian financial markets of what the US Federal Reserve might do may have been greatly exaggerated, judging by how little foreign investment that entered Asia during the past four years has left so far in anticipation of tighter US monetary policy, data shows.
Government bonds, currencies, and equities in Asia have been sold-off since April after the Fed signalled it would soon cut back its bond-buying programme, effectively beginning a tightening in its nearly five-year super-easy monetary settings.
Yet, despite a bloodbath in emerging markets in June that sent stock markets in Asia to multiyear troughs and currencies such as the Indian rupee to record lows, both the anecdotal evidence and the data suggest very little money has left Asia.
Going purely by foreign exchange reserves data, emerging Asia's top-10 economies, from China to the Philippines, received inflows worth US$2.1 trillion between November 2008 and April 2013, the period when the Fed pumped massive amounts of cheap money into markets. Since April, about US$86 billion, or just 4 per cent of that cash, has left Asia, with about half of those outflows from China.
Other independent measures of capital flows point toward the same conclusion. Deutsche Bank estimates that foreign investors withdrew roughly US$19 billion from Asian local currency debt markets between June and August. Despite that, net flows for the year are a positive US$5 billion and the outflows pale when compared with inflows of US$203 billion since early 2009.
"Ten years of large capital flows into emerging markets cannot be unwound in 10 weeks," said Stephen Jen, co-founder of London-based investment firm SLJ Macro Partners.
Jen reckons that because emerging market assets were treated as safer than vulnerable developed markets during the years of easy money, any meaningful recovery in those developed markets would lead to more outflows from emerging markets.
The Fed first embarked on its quantitative easing (QE) policy to revive an economy devastated by the 2008 financial crisis in November of that year, when it snapped up US$2.1 trillion worth of mortgage-backed securities and Treasury bills in a programme that ran until March 2010. A second round of easing was between November 2010 and June 2011, when the Fed printed an additional US$600 billion buying long-term Treasuries. A third round was announced in September last year, with the Fed buying US$40 billion of mortgage-backed securities a month.
That cash, and near-zero rates in Europe channelled trillions of US dollars into high-yielding emerging markets. In all, US$3.05 trillion of foreign money was pumped into emerging markets since 2009, data from the Institute of International Finance showed.
Only US$231 billion of that was official money, so theoretically a good chunk of cash which is not a dedicated allocation by funds to specific countries could leave if the Fed starts normalising interest rates.
But the money has been slow to leave. And analysts looking for guidance from previous episodes of Fed policy tightening, such as in 1994, 1999, or more recently 2003, run foul of overlooking key differences in the situation. First, the Fed is merely talking of reducing bond purchases, for which there are no historic parallels, rather than raising rates. It has pledged to keep short-term rates near zero until mid-2015.
Second, no one is quite sure how soon the cheap money will vanish or what the accompanying US economic revival will look like.
Third, the climb in US yields has been modest: even after a 110 basis points climb since April, 10-year yields are at 2.9 per cent, less than half the levels in 2000 and far from peak yields of 8 per cent during the 1993-1994 cycle.
But though modest, rising US yields could be good news for equities if they are accompanied by stronger global growth, which would mean improved global demand and higher corporate earnings.
"This issue is more fundamentally about local fixed-income than about equities," said Michael Kurtz, chief Asian equity strategist at Nomura. "When money is coming out of local fixed income and the currency gets volatile, equities get dragged along for the ride."