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

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The Middle East conflict has triggered a surge in oil prices, and emerging markets in Asia are experiencing a historic level of foreign capital outflow. International investors continue to sell off Asian stocks that are highly dependent on energy imports, and the scale of outflow is on track 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 about $52 billion worth of Asian (excluding China) emerging market stocks, putting the region’s monthly outflow on track to set a historical record since 2009. Markets highly dependent on crude oil imports such as South Korea and India have been hardest hit, becoming the primary targets for sell-offs.

Last week, Morgan Stanley strategists recommended investors reduce their holdings at the peak of the Asian stock market rebound, citing ongoing oil supply disruption risks in the region. Meanwhile, a stronger dollar and profit-taking in semiconductor stocks have further exacerbated the downturn in Asian markets, while U.S. stocks have remained relatively stable due to America’s position as a net energy exporter, resulting in a clear divergence between U.S. and Chinese stock market trends.

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

Sell-off scale hits highest in over fifteen years

This month’s scale of foreign capital flight has surpassed several historical benchmarks, highlighting the severity of the shock.

According to Bloomberg data, this month’s outflow from Asian emerging markets has not only exceeded the levels seen in March 2020 at the onset of the COVID-19 pandemic, but has also more than doubled the scale during the Russia-Ukraine shock in June 2022.

The high oil prices have cast a shadow over the economic outlook of net energy importers, most of which are concentrated in Asia. Due to their high dependence on imported crude oil, South Korea and India are especially impacted by foreign sell-offs, dragging down the overall regional market performance.

Gary Tan, portfolio manager at Allspring Global Investments, stated: "We may be witnessing a round of short-term capital rotation towards markets with lower exposure to Middle Eastern energy risks, and this trend may continue until there is greater clarity in the Iran situation." He further noted that Asia accounts for about 80% of the oil passing through the Strait of Hormuz. "Therefore, any disruptions will impact inflation and growth prospects in the region far more than elsewhere."

Asia underperforms US stocks, multiple pressures

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

The strengthening dollar and profit-taking from chip stocks have further intensified pressure on Asian markets. Last week, Morgan Stanley strategists recommended investors sell at highs during rebounds in Asian stocks, emphasizing the region’s vulnerability to sustained oil disruption risks.

The Iran situation is the core variable determining whether foreign capital can return to Asia, and the likelihood of clarity in the short term is limited. At present, the U.S. insists diplomatic engagement continues, but Iran has openly rejected Trump’s ceasefire proposal, and negotiation progress has stalled. Gary Tan also stated that until the situation becomes clearer, capital rotation trends are likely to persist, meaning foreign investors' wait-and-see stance towards Asian stocks will be hard to reverse in the short term.

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