South-east Asian markets roiled as investors turn to China

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Global investors are pulling their money out of south-east Asia as concerns mount over the region’s largest economies and many traders rotate back into Chinese equities.

Indonesia and Thailand, the region’s two biggest economies, have seen foreign equity outflows in the year to date, while their stock markets have been some of the worst performing this year.

Indonesian stocks fell to their lowest in four years this week — though they have since recovered some of the losses — while the rupiah is trading near five-year lows. The Jakarta Composite stock benchmark extended losses on Friday, dropping 1.2 per cent.

The MSCI Indonesia index is down about 16 per cent from the start of the year in US dollar terms. The MSCI Thailand is down just over 12 per cent in the same timeframe.

The sell-off, driven by economic concerns in both countries, has been exacerbated by a global trade war sparked by US President Donald Trump as well as regional fund managers rotating their money away from the region and towards China.

Foreign investors have pulled a net $1.3bn from Indonesian markets and $500mn from Thai equities this year, while putting $13bn into Chinese equities, according to figures from the Institute of International Finance.

Chinese equities have been some of the best-performing assets globally this year, as investors pile into tech stocks in the wake of Chinese start-up DeepSeek’s advances in artificial intelligence. Hong Kong’s Hang Seng index is up more than 20 per cent since the beginning of the year.

“It’s hard to take a strong call on south-east Asian markets when China is back in the equation,” said Daniel Ng, Asian equities investment manager at Aberdeen.

South-east Asia could also be hit by Trump’s tariffs, warned analysts, not least because of a flood of rerouted exports from China.

“With trade war risks pushing down commodity prices and China exporting more to the rest of the world, countries that are more vulnerable to these factors will be more exposed,” said Trinh Nguyen, senior economist for emerging Asian markets at Natixis.

Indonesian assets have been hit by concerns over slowing economic growth and President Prabowo Subianto’s expansionary fiscal policies.

Since he took office in October, the rupiah has fallen about 6 per cent against the dollar. It is one of the world’s worst-performing currencies this year alongside the Turkish lira and Argentine peso.

Weakening purchasing power and falling consumer confidence have raised concerns about growth in south-east Asia’s largest economy at a time when investors are also worried about fiscal discipline. Prabowo has planned a nationwide free meals programme for schoolchildren and pregnant mothers at an expected cost of $28bn a year.

Other policies, such as the launch of a new sovereign wealth fund, Danantara, have also rattled investors. The new fund, which will report directly to the president and manage some of the country’s largest companies, has raised fears of political interference and lax governance.

“Investors are jittery [about Indonesia] arguably more so than they were during the early stages of the pandemic,” said Darren Tay, head of Asia-Pacific country risk at BMI, a unit of Fitch Solutions.

Outflows from Indonesia are expected to continue. “In an environment of high macro policy and political uncertainty, the risk of outflows from the equity market remains visible, not only from foreign but also resident investors,” said Helmi Arman, Citi’s chief economist for Indonesia.

Thailand, south-east Asia’s second-largest economy, has also been grappling with slower consumption and private investment. At about 90 per cent of GDP, its household debt is one of the highest in Asia and severely limiting consumer spending.

The country is also heavily exposed to Trump’s tariffs given its large trade surplus with the US. Analysts at Bank of America estimated that a 10 per cent US tariff on Thai exports could shave 0.2-0.3 per cent off its GDP.

“Thailand’s economic outlook remains challenging, with manufacturing stagnation, slowing tourism, and muted domestic demand,” analysts wrote.

“While monetary easing may help, structural reforms are urgently needed to boost productivity and attract investment. Without proactive investment and ambitious reforms, Thailand risks falling into a low-growth trap.”

Data by Haohsiang Ko