Foreigners pour billions into Taiwan, South Korea stocks on AI, growth optimism

Foreign investors significantly increased their exposure to Asian equities for a third consecutive month in July, driven by optimism around AI and growth prospects, particularly in Taiwan and South Korea. Taiwan attracted $7.78 billion, its highest inflow since 2008, while South Korea received $4.52 billion, as both nations benefited from AI-related investments and South Korea's shareholder reforms. Although Thailand saw its first inflow in nine months with $499 million despite ongoing political and economic challenges, India experienced over $2 billion in outflows, reflecting a divergent regional trend amidst stabilizing US trade relations.

Analysis

Foreign capital flows into Asian equities demonstrated significant divergence in July, marking a third consecutive month of overall net inflows but with heavy concentration in specific markets. Taiwan and South Korea were the primary beneficiaries, attracting a combined $12.3 billion, driven by a global surge in AI-related investment. Taiwan's inflow of $7.78 billion was its largest since the 2008 financial crisis, while South Korea's $4.52 billion was its highest since February of the prior year, with both markets' benchmark indices advancing approximately 6%. This three-month accumulation of $25.7 billion into these two tech exporters underscores a powerful thematic trade. In contrast, Thailand saw its first net inflow ($499 million) in nine months, fueling a 14% monthly surge in its SET index; however, this appears to be a valuation-driven rebound rather than a fundamental shift, as the market remains down 10% year-to-date amid significant headwinds including political uncertainty and high household debt. Other major regional markets saw a reversal of fortune, with India experiencing a sharp outflow of over $2 billion, its largest since February, while Indonesia and the Philippines also recorded net sales. Vietnam stood out with a modest $326 million inflow, supported by its distinct growth outlook and favorable trade position with the U.S.

Key Decisions for Investors

• Given the strong, sustained inflows and index performance driven by the structural AI theme, investors should consider maintaining or increasing exposure to Taiwan and South Korea, while monitoring for any signs of overheating or specific domestic risks like South Korea's proposed tax reforms.
• The sharp rally in Thailand following a marginal inflow should be viewed with caution; the underlying political and macroeconomic risks remain substantial, suggesting the rebound may be an opportunity to reduce exposure rather than build new positions.
• The significant outflows from India, breaking a three-month buying streak, alongside continued outflows from Indonesia and the Philippines, warrant a reassessment of positions in these markets as investor sentiment has clearly shifted.
• The divergence in capital flows underscores the need for a country-specific allocation strategy in Asia, as the AI-centric momentum in North Asia is currently dominating broader emerging market investment theses.