Asian equity markets are expected to continue attracting offshore capital inflows following the US Federal Reserve's remarks that interest rate normalisation will slow, say analysts.
Although the Fed raised the interest rate last week, it still insists that interest rate normalisation will be gradual despite a better-than-expected improvement in US economic conditions, said Komsorn Prakobphol, head of Tisco Securities' economic strategy unit.
But the US dollar depreciation following the November inflation figure came in lower than expected, said Mr Komsorn.
The Fed last week raised interest rates to 1.25-1.5%, in line with market expectations and revised up its US economic growth forecast for next year as a result of the government's tax reform policy.
Mr Komsorn said it is expected the US dollar to continue depreciating until the end of next year's first quarter due to pressure from investors on exchange rates.
The projected dollar depreciation will beneficial for emerging markets, especially Taiwan, South Korea, and Thailand, where fund inflows are anticipated to move into capital markets from this year-end to the first quarter of 2018.
Foreign funds, however, are expected to avoid investment in China due to uncertainty about the Chinese government's control over the private sector's debt-liability level and the property bubble.
"Taiwan and South Korea will attract more fund inflows compared with Thailand's stock market due to how these two countries' stock markets have fallen recently. The Thai stock market keeps rising because local institutional investors have received money from investments made in the long-term equity fund and retirement mutual fund to purchase stocks, giving the market limited upside gains," said Mr Komsorn.
The baht is expected to appreciate to 32 against the greenback during next year's first half, he said.
But offshore capital inflows are expected to stay in emerging markets for a short-term period and fund outflows are projected in the second quarter after the Fed starts to raise the interest rate again, which could take place in March, he said.
"But analysts expect the Fed will increase its dot plot from three times to four times following the US economic recovery, so this is still a concerning factor to watch for next year," said Mr Komsorn.
Jitra Amorntham, head of research at Finansia Syrus Securities, said offshore funds inflows registered a large net buy position in South Korea last week, while recording a net sell position in Thailand.
"Offshore funds look set to continue streaming into the region after the European Central Bank [ECB] has maintained its policy interest rate, leaving room for even more stimulus," said Ms Jitra.
