SINGAPORE/HONG KONG Alongside the great rotation from bonds to equities and from emerging to developed markets that has been 2013's overriding investment theme, Asia is seeing its own migration in portfolio flows: from the South to North.
Foreign investment flows have lifted stock markets in China, South Korea and Taiwan since July, the first and tentative signs that investors still see pockets of value at a time the outlook for emerging markets is glum.
The appeal of these markets comes from several factors.
While the consensus calls are still for an outperformance of equity markets in Japan, the United States and the rest of the developed world, a growing number of investors believe there is scope for Asia's trade-driven, open economies to do well as U.S. growth recovers.
To add to the mix, stock prices have been hammered in China and Korea, based on what some analysts believe are exaggerated perceptions of a collapse in Chinese growth, and these countries are buffered by huge trade surpluses.
South Korea received foreign portfolio flows totaling $853 million into equities in July, reversing part of the heavy outflows in previous months, data collated by BNP Paribas showed. Korea's bond market has received more than $12 billion this year.
Foreigners also bought $2.75 billion of Taiwan equities last month, offsetting sales in June. They sold $253 million of Indonesian equities and heavy amounts of bonds and stocks in India.
Data on flows into Chinese shares and bonds is scarce, but the China Enterprises Index .HSCE of the top Chinese listings in Hong Kong has jumped about 9.5 percent since the end of June.
'A SHARP UNWIND'
"The whole story in Asia is one of rotation," said John Woods, head of Asia fixed income at Citi Investment Management. "What we are seeing in terms of flows is a sharp unwind of Southeast Asia and capital inflows into North Asia, particularly Korea and Taiwan."
For a majority of investors, particularly those who aren't dedicated to emerging markets, the biggest factor driving decisions is the coming monetary tapering by the U.S. Federal Reserve. Looming is a reduction in the four-year quantitative easing (QE) that flooded markets with cash and sent investors scurrying for yield.
The big picture asset allocation theme, therefore, remains one of switching from bonds to equities. Citi data shows bond funds globally saw outflows of $2.2 billion in the week that ended August 7, while equity funds received $9.6 billion.
Thus, barring some allocation at the margin, few fund managers want to risk exposure to Asia's slowing economies in an environment of rising yields and better U.S. growth.
"The QE unwind is a big issue," said Mark Wills, senior portfolio manager at State Street Global Advisors' asset allocation team in Sydney.
"Once tapering was on the table and the hunt for yield ended, investors wanted the best quality risk they could lay their hands on and that's U.S. equities at the moment."
But equities in the most sought-after developed markets - Japan and the U.S. - are expensive and that's one reason investors are still quite discerning about putting all their money in dollar or yen assets.
"Revenue for companies in the S&P 500 is still pretty poor and they're finding it hard to increase margins," said Wills.
VALUE IN ASIA
Based on Thomson Reuters StarMine data on analysts' earnings forecasts in the next year, U.S. equities are trading at an average price-to-earnings (P/E) ratio of 14.7. Japan trades at a P/E of 14.5. That compares with 10 for emerging Asia, and an even cheaper 8.5 for China and 8 for Korea.
That gap in P/E valuation between Asia (outside Japan) and the U.S. is at its widest in eight years.
While analysts have scrambled to cut profit forecasts in Asia ex-Japan since February, regional earnings growth over the next year is still expected to outpace that in the U.S. Consensus forecasts are for average earnings-per-share (EPS) increases in the next 12 months of 9.6 percent in the U.S., versus 13.5 percent for emerging Asia, 17.5 for Korea and 18 for Taiwan, according to Thomson Reuters I/B/E/S.
Even China, which has often burned investors, is looking better to some.
"Our view towards China is two-fold in that much of the bad news has been priced in, that valuations are compelling and we're taking a 12-18 month view that equity markets in China will be higher," said Citi's Woods.
It's more than just valuations that make North Asia attractive for the discerning investor. These countries offer better direct exposure to the pick-up in technology exports that will accompany a U.S. recovery. Their markets fare better when oil and base metal prices are lower than do Malaysia and Indonesia, whose markets are heavy on commodity producers.
The selloff in dollar bonds this year, as markets pre-empted a Fed tapering, has also been milder in Korea.
Asia on the whole has seen yields .JPMACI climb 100 basis points to 5.3 percent since May this year, with only about another 100-150 basis points to go before bond yields are at long-run averages. Before long, the bonds would be attractive from a risk-return perspective, Citi analysts reckon.
So far, though, there are enough reasons to keep global investors hesitant about putting money into North Asia.
The biggest risk comes from China, over whether authorities there can keep growth from falling too low even while they focus on fixing banks and the labor market.
Other risks could come from foreign exchange losses as a rising U.S. dollar drives emerging market currencies down.
And finally, there is the question of whether investors are being too optimistic about how strong the U.S. economy will be next year and how much Asia's export-driven economies will benefit from that recovery.
(Editing by Richard Borsuk)