Capital outflows pose economic challenge

The main development of the past month has been the big sell-off in financial markets which has been triggered by worries about the consequences of a scaling back of QE in the US. Foreign investors pulled money out of the region in June, sending equities and currencies lower. Overall, provided the recent sell-off does not turn into a rout, we do not expect the market turmoil to have a large economic impact. That said, the general trend of recent months has been one of slowing growth. Weak demand from developed economies and China’s continued slowdown will ensure Asia’s recovery remains subdued, regardless of how monetary tightening by the US Fed plays out in markets.