Investors are shifting their focus from U.S. stocks to Asian equity funds, as the Trump administration’s tariffs create uncertainty over the future growth of U.S. markets. This shift is reflected in a significant surge in net flows into Asian exchange-traded funds (ETFs), with $8.45 billion invested over the three weeks ending May 7. This marks the highest inflow in seven months, signaling a growing interest in diversifying away from the U.S. market. Meanwhile, U.S. equity funds saw a fourth consecutive week of outflows, totaling $43.5 billion by May 7, as investor confidence wavers under the weight of the ongoing trade disputes.
Portfolio diversification is becoming a key theme for investors, with many concerned about the over-concentration in a few large U.S. tech stocks, often referred to as the “Magnificent 7.” This has led to greater flows into non-U.S. markets, particularly Asia, which has been performing well recently. Additionally, strengthening currencies in several Asian nations have made the region even more appealing for foreign buyers. Investors are also betting that Asia could either benefit from trade deals or emerge as a winner as countries look for new routes to bypass U.S. tariffs.
Selective investments are also growing in popularity, as investors focus on specific Asian markets where they expect favorable outcomes from the ongoing tariff negotiations. For instance, MSCI’s index of Asia-Pacific shares outside Japan has risen by over 4% so far this year, while U.S. indices such as the S&P 500 and Nasdaq have experienced declines of nearly 4% and 7%, respectively.
Valuations in Asia are seen as more attractive compared to the U.S. The one-year forward price-to-earnings (PE) ratio for markets like Malaysia and Taiwan is lower than that of the U.S., with Malaysia standing at 17.56 and Taiwan at 14.64, compared to the S&P 500’s PE ratio of 20.62. Analysts believe that the need for diversification, combined with the expectation of a weaker U.S. dollar and more favorable valuations, is likely to continue supporting the appeal of Asian equities. The light positioning in these markets, along with positive sentiment surrounding trade negotiations, further adds to the attractiveness of Asia as an investment destination.
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