BNP Paribas: Asia Fund Flows: Looking good to end the year

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Asia-6: Looking good to end the year 
USD1.6b entered Asia-6 last week compared to USD696m the previous week. Inflows
remained moderate, slightly below the average in the second half of the year.
Volatility continued to fall with the VIX closing the week at 16.1, lower than the
previous week’s 17.6. This was largely due to a lack of activity in the market as 2010
draws to a close. The sharp downgrade of Ireland’s credit rating by five notches by
Moody’s last week had a minimal impact on equity markets, which viewed the
downgrade as inevitable.

With abundant liquidity and improving economic conditions in the US, it is likely that
some of the inflow that has entered Asia in the past half year might flow back to the
US. Nevertheless, as the VIX moves lower, we expect inflow to continue to Asia. As
such, we expect near-term inflow to remain moderate in the coming weeks. MSCI
Asia ex-Japan closed slightly lower w-w by 0.3%, following a 0.2% w-w fall in the
preceding week. As the year draws to a close we note that YTD foreign inflow to Asia-
6 is at USD58.1b, still on track to reach close to last year’s inflow of USD60b in the
remaining two weeks.

In North Asia, Korea recorded its largest inflow within Asia-6 last week (USD1.0b)
leading the KOSPI upward by 2.0% w-w last week. Of particular note is that no
weekly net foreign outflow from Korea has been recorded since the serious
confrontation between the two Koreas weeks earlier. This indicates that markets have
largely grown accustomed to belligerent behaviour from Pyongyang, knowing that the
costs of escalation of tensions are too high to pay for both sides.

In ASEAN, a surge of outflow to Indonesia was recorded, as USD349m in foreign
buying, amounting to more than +2 SD from the mean. The JCI plummeted by 4.4%
w-w last week, its largest drop since May 2010. The latest outflow comes on the back
of the largest yearly inflow of USD394m in the preceding week. Within ASEAN, all
three indices (SET, JCI, PSE) recorded w-w losses (1.3%, 4.4%, 1.9%) while North
Asia rose broadly, playing catch-up for their comparatively tepid performances for
2010.