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The continuation of the reflation theme should benefit all EM Asia markets, particularly if equity market sentiment remains upbeat. However, our bias would be to own currencies that have the highest statistical significance with these global reflation proxies. KRW sits at the top of this list and as we noted in our update last week we are turning more constructive on the won outlook.
In terms of the betas with respect to Korean portfolio inflows we find the following: for 1% rise in global equities boosts monthly inflows by USD674mn, while a 1bp rise in the PMI export orders index boosts inflows by USD1755mn, while a1% rise in commodity prices boosts inflows by USD374mn. Taiwan has the third highest average in terms of t-stats across the regressions. Naturally, though, the betas are slightly lower.
Interestingly, Thailand portfolio flows show the second highest t-stat with respect to global reflation indicators. This is particularly evident in global trade commodity prices. Given Thailand is a net commodity importer this is a surprising result. However, the energy and utilities sub-index has the largest weight amongst the groups that make up Thailand equities.
Hence higher commodity prices may be seen as a positive for the outlook for such a group. Foreign participation in Thailand equity and bond markets has been more limited in recent years (with foreign ownership levels coming down for bonds but steady for equities).
Indeed since the start of the year, offshore inflows into Thailand equities are only marginally positive and have underperformed inflow momentum to Korea and Taiwan. Still, we need to monitor these trends, as a stronger reflationary environment could drive a pickup in portfolio inflows.
