Foreign institutional investors have called it quits on Asian equities after US President Donald Trump’s America First policy triggered global trade policy uncertainty. A likely shift in world trade dynamics due to potential reciprocal tariffs could hurt the economic prospects of Asian economies. With a strengthening US dollar, Asian equities are losing their appeal, prompting a sell-off by FIIs.
The new US administration has already enacted additional 10% tariffs on imports from China and 25% tariffs on steel and aluminium, and more such tariffs may be on the cards.
“Though most Asia-Pacific countries other than China will likely be spared significant direct US tariffs being implemented against them, there is a risk of second-order effects impacting economic growth,” Oxford Economics said in a report dated 17 February. “Supply chain impacts will especially be felt in Vietnam where, for instance, intermediate electronics production accounts for one-third of Vietnamese exports to China.”
“While there is a threat to Indian equities from valuations, cheaper Chinese stocks and the potential impact from DeepSeek technology, India is structurally better placed than China,” said Hitesh Jain, lead analyst at Yes Securities.
While it is tough to gauge the actual impact at this stage, sentiment has turned downbeat. Indonesia, Malaysia, the Philippines, South Korea, Taiwan and Vietnam are bearing the brunt. (See chart) Once the darling of foreign investors, India too isn’t immune though it has comparatively lower dependence on the US economy than Asian peers and is more domestic-focused.
Foreign investors have sold Indian stocks worth $10,738 million so far in 2025, even as domestic institutional investors remain on a buying spree. This has meant that India – an outperformer in 2024 – is now underperforming peers. The MSCI India Index has fallen 7.3% so far in 2025 compared with positive returns in the MSCI Asia Ex-Japan and MSCI Emerging Markets indices, according to Bloomberg data.
Dollar trajectory
“The rotation of foreign money from Asian equities into developed markets usually depends on how global macros shape and currently they seem to be unfavourable for emerging markets,” said Shrikant Chouhan, head of equity research at Kotak Securities Ltd.
The most critical factor driving foreign investors’ appetite for Asian equities is the trajectory of the US dollar. Here, the US Federal Reserve’s decision to move on further interest rate cuts also need to be monitored.
“With the US dollar index above the 104 mark and bond yields above 4%, we expect FII outflows from Asian equities to continue. We have seen in the past that when Republicans come to power in the US, emerging market equities become volatile and that is playing this time as well,” Chouhan added.
What can reverse FII outflows? Of course, a key factor is how Trump’s reciprocal tariffs play out. The expectations are that the trading partners of the US would negotiate for a middle ground to shield global economic growth from rising protectionism.
The minutes of the latest Reserve Bank of India meeting indicate that the country’s central bank is willing to ease rates to support growth as the improving inflation outlook provides legroom for this. The RBI’s dovish tone is comforting, but not enough to regain the confidence of FIIs.
“The consensus Nifty EPS growth estimate is 10-12% for FY27 – whether that will come or not is still doubtful in the current backdrop, so that is one factor holding FIIs back from investing in India,” Jain of Yes Securities said.
Secondly, until there is increasing visibility on pick-up in urban consumption, private capital expenditure and valuations become more reasonable, FIIs won’t come back, he added.