By Patturaja Murugaboopathy and Gaurav Dogra
(Reuters) - Asian equity markets saw heavy outflows in May as a sudden escalation in the U.S.-China trade war threatened to put more pressure on export-reliant regional economies and companies which are highly reliant on Chinese sales.
Asian equities received solid cross-border inflows in the first four months of this year on expectations that the world's two biggest economies were closing in on a trade deal. But confidence quickly soured after the United States raised levies on $200 billion worth of Chinese goods and threatened even more.
Outside investors sold $6.4 billion worth of Asian equities last month, their biggest sales since October 2018, data from stock exchanges in South Korea, Taiwan, India, Thailand, Philippines, Indonesia and Vietnam showed.
(GRAPHIC: Foreign investments in Asian equities - https://tmsnrt.rs/2KlWXkx)
Taiwan and South Korea, which have extensive ties with tech companies in China and are part of their supply chains, led the regional outflows. Taiwan and South Korean markets witnessed combined foreign sales of over $7 billion last month.
Indonesian and Philippine equities also faced outflows of $411 million and $271 million, respectively.
On the other hand, Indian equities received $1.15 billion of inflows, as a landslide victory for incumbent Prime Minister Narendra Modi provided hopes for more progressive reforms ahead.
"In our view, Modi 2.0 has the potential to deepen reforms further, which would contribute to India being able to reap its growth potential and to remain the fastest growing emerging giant," Arjen van Dijkhuizen, senior economist at ABN AMRO (AS:ABNd) said in a report.
While trade uncertainties are expected to be front and center for most regional investors in coming months, Asian markets are expected to draw some support from expectations that the Federal Reserve may cut interest rates this year if U.S. growth weakens.
China is also expected to ease policy further and roll out more stimulus measures.
"While foreign flows into Asia equities had moderated in the month of May against the backdrop of escalating trade concerns and worries of the impact on global growth, the dovish pivot seen of the Federal Reserve could provide some relief ahead," said Jingyi Pan, a Singapore-based market strategist with financial services firm IG.
Fed Funds rate futures are pricing in more than two 25- basis point cuts by the end of this year, with one almost fully priced in by July.
"The significant slide in G3 bond yields, occurring in a context of modest financial volatility, is supportive of capital flows into Asia," said Chang Wei Liang, forex strategist at Mizuho Bank.