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Another warning is flashing on Asia's 11% stock-market rally

[SINGAPORE] The wall of worry surrounding Asia's double-digit stock market growth this year just got another impetus: equity ETFs (exchange-traded funds) inflows have dwindled.

Despite a 9 per cent increase to US$502 billion in assets under management for Asia equity ETFs so far this year, net inflows have been tapering off, according to data compiled by Citigroup Inc. On top of that, a monthly net outflow - the second time in more than two years - was recorded in March.

The MSCI Asia Pacific Index's 11 per cent rally this year - adding about US$4 trillion in value - has already been attracting some scepticism. Market watchers have been warning that investors should be cautious after the best first-quarter rally since 2012 for the regional benchmark index:

Concerns about global economic strength and whether some developed markets will enter a recession a year or two from now;

This year's lack of volatility not just in equities but across asset classes;

Japan is getting ready for a bilateral trade battle with the US, set for centre stage in Washington this week as US-China tensions cool;

Weak fund flows into Asia ex-Japan equity funds; and

Regional equity valuations have risen at a tremendous pace of 20 per cent since the December low.

Early earnings results tell a cautionary tale

"At the end of last year, we were pricing something like Armageddon in regards to rates and the trade outlook," said Christopher Watson, London-based fund manager with Finisterre Capital, in an interview in Hong Kong Friday. "The equity market is convinced everything seems to be rainbow and sunshine for the remainder of the year. And I guess one of the things we find somewhat disconcerting is the disconnect between rates and equity," he said.

Some investors might be quietly pulling out of this surge - the regional benchmark gauge posted a loss last week.

And in China, the first in Asia to enter a bull market this year, the Shanghai Composite Index posted its worst week this year. Chinese investors boosted leverage for 10 straight sessions through Wednesday to a 10-month high of 960.3 billion yuan (S$193.7 billion). That amount, which is more than the five-year average, might prompt the government to cool the country's world-beating stocks rally.

It's hard to ignore the reasons behind the buoyant market: a dovish tilt in central banks, hopes for a US-China trade deal, investors expecting more inflows due to a bigger weighting of Chinese companies in MSCI Inc's gauges, and government policies to boost the market. Though this might somewhat be stymied by MSCI Inc's statement last week that it will delay the transition of MSCI All China Indexes to the MSCI China All Shares Indexes to Nov 26 from June 1, following feedback from market participants.

Still, China's trade and lending data released on Friday, signalled that the world's second-largest economy was on more stable footing, sending US stocks higher.

For Frank Benzimra, the head of Asia equity strategy at Societe Generale, Asian stocks have more upside than the US market, which he expects to bottom out next year. "The Asia equities rebound will continue in the coming quarter as policy fundamentals are improving, equity valuations remain moderate", and equity market position is still "light", he wrote in a March report.

JPMorgan's Kerry Craig sees a light at the end of the tunnel with somewhat stronger economic data coming out of parts of Asia, pointing to "a lifting in that industrial production cycle, that manufacturing cycle, that can help maintain the equity outlook", he said. "That creates a floor under it, and if we look at the Asian market in particular, it's going to benefit from that."

While earlier this year, economic data for the region fell short of projections by the most in three years, that seems to be turning around. Since mid-March, the Citi Economic Surprise Index for Asia-Pacific has indicated that even though data releases have been worse than expected, the trend is shifting to in-line expectations.

Even so, on Saturday global finance ministers and central bankers said they were prepared to "act promptly" to shore up growth in a world economy that faces downside risks including trade tensions, according to a statement by the International Monetary and Financial Committee, the main advisory panel of the IMF's 189 member countries.

And flows don't paint an optimistic picture. Global equity fund withdrawals continued for a fourth week during the April 4 to 10 period, according to the latest report from Jefferies Financial Group Inc, citing EPFR data. For Asia, equity funds saw US$1.9 billion in outflows for that time frame.


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