Most regional benchmark stock indices entered a bull market in January 2023 following the reopening of China and the weakening of the US dollar. This resulted in an appreciation of local currencies across major economies in the region. The situation changed in February when the Fed and the ECB raised policy rates by 25 and 50 basis points, respectively. In an atmosphere of prolonged global economic uncertainty, these policy rate hikes drove down the value of regional currencies, but the banking turmoil that started in March attracted liquidity back to the relative safety offered by the region’s equity and bond markets.
Country-level portfolio outflows in the region also weakened local currencies during the first half of the year. In terms of equity markets, several economies in the region experienced significant sell-offs of stocks in the first half of the year as foreign investors reacted to domestic and global triggers. This resulted in considerable amounts of equity leaving the financial markets, leading to a net outflow of portfolio equity investments. For example, India accrued equity outflows estimated at USD 2.5 billion from January to March, largely driven by a huge sell-off of stocks in January. However, this trend was reversed in the second quarter of the year as the country’s stock markets rebounded, generating net equity inflows of up to USD 13.6 billion from foreign portfolio investors. Similarly, Thailand experienced a prolonged equity market slump resulting in equity outflow equivalent to USD 3.7 billion from February to June. This was exacerbated by uncertainty and tight policy rates in the United States, with sell-offs of electronics stocks by foreign investors leading to an 80-point, or 5%, drop in Thailand’s benchmark index. Malaysia also recorded net portfolio equity outflows between January and June, estimated at USD 929 million.
Meanwhile, the region’s bond markets are sensitive to variations in the monetary policy stances of both Emerging Asian economies and the United States. Yield spreads between 1-year US government bonds and 1-year government bonds in some of the region’s major economies have been declining since May and dropped further in the middle of June (Figure 9). These trends in yield spreads coincided with the weakening of currencies in the region (except for Singapore). The drop in yield spreads between 1-year US government bonds and 1-year local government bonds provides insight into the susceptibility of currency markets to changes in financial markets (ADB, 2023b). For example, the upsurge of US bond yields in August caused bond yields in Indonesia and India to rise as well. The currencies of both countries slightly weakened during the period.
