In the past week, the investment landscape in the Asia-Pacific region revealed striking contrasts, particularly evident in the performances of various national stock marketsWhile the Southeast Asian markets generally faced declines, the South Korean stock market demonstrated a notable upward trend, which has attracted significant attention from investors and analysts alike.

For three consecutive weeks, Southeast Asian stock exchanges have shown signs of fatigue, with Indonesia leading the downturnThe Jakarta Composite Index (JKSE) felt the brunt of this negative sentiment, experiencing a significant week-on-week decrease of 1.54%, closing at 6,638.46 pointsOn the other hand, the Ho Chi Minh City Index in Vietnam managed a slight increase of 0.07%, landing at 1,276.08 pointsComparatively, Thailand's SET Index fell by 0.78% to 1,272.10, while Malaysia's Kuala Lumpur Composite Index edged up by a mere 0.04% to 1,591.60. In a similar vein, Singapore's Straits Times Index recorded a modest rise of 0.42% to end the week at 3,877.50, whereas the Philippines' Manila Index faced a setback, dropping 1.52% or 93.66 points to rest at 6,061.33.

According to Jiang Han, a senior researcher at Pangu Think Tank, the overarching decline in Southeast Asian stock markets can largely be attributed to the prevailing risk-off sentiment within the global marketInvestors, facing uncertainty, are often trepidatious about emerging markets, which are generally perceived as higher-risk investmentsBeyond the global mood, regional economic fundamentals, fluctuations in policy, and geopolitical tensions further contribute to the volatility experienced in these markets.

Conversely, South Korea's KOSPI Index witnessed a robust increase, climbing 2.74% to reach 2,591.05 points for the weekThis upward movement marks two weeks of consecutive gains for the South Korean market, a fact that has garnered considerable interestJiang Han interprets this positive trajectory as a reflection of growing investor confidence in South Korea's economic fundamentals and an overall improvement in market sentiment.

As the Indonesian stock market faced turbulent times, analysts noted a significant outflow of global funds, resulting in a harsh sell-off

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This was underscored by Indonesia’s enduring drop, with the stock market experiencing a decrease for two continuous days at the start of the week, culminating in a cumulative decline of 1.54%, marking a three-week downward trend and pushing the market to a three-year low, dangerously close to a technical bear market thresholdSince hitting a high in September the previous year, the Jakarta Composite Index has plummeted over 15%.

Jiang Ping, a finance professor at the University of International Business and Economics (UIBE), elaborated on this decline, pointing out that rebounding from a low of 3,911 points in March 2020 to a peak of 7,910 points in September 2024 represented a near doubling before it began retracting to its current levels around 6,640 points, a decrease of approximately 16%. She identifies the strengthening of the US dollar against the Indonesian rupiah as a crucial factor in the recent downturn of the stock marketThe strong dollar has prompted global investors to withdraw from Indonesia, exacerbating the descentMoreover, Indonesia’s plight is compounded by slowing economic growth and lackluster corporate earnings, which inflate the valuation levels further contributing to capital flight.

The situation is further intensified by an array of negative factors, including global trade tensions, domestic economic weakness, and apprehensions about President Prabowo Subianto's social spending plans, causing overseas investors to engage in daily net sell-offs of Indonesian stocksAnalysts have commented on fears that the strengthening dollar, coupled with a weakening rupiah, will heighten inflationary pressures while simultaneously restricting the central bank's ability to cut interest ratesThe decision by MSCI to exclude certain Indonesian stocks from its indices ignited further selling pressure on these equities.

Amid these challenges, Indonesia is striving to revitalize its stock market by introducing short-selling mechanisms in the second quarter, intending to broaden the investment choices available to traders

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These strategies are part of the Indonesia Stock Exchange’s efforts to enhance market liquidity and facilitate a fair price discovery processJeffrey Hendrik, the Director of Development at IDX, stated that by implementing these mechanisms, investors would gain opportunities to optimize their profitability in an ever-changing environment.

Moreover, Theodora Vinca Natalie Manik, a retail manager at Wansili Securities, expressed optimism that implementing intra-day short selling would contribute positively to the development of Indonesia's capital markets, asserting it might improve market efficiency by balancing overvalued stocks back to fair pricesHowever, she cautioned that although allowing short selling may elevate liquidity in the markets, it could inadvertently amplify volatility risks and accelerate declines—potentially hindering stock market stimulation efforts.

The most recent fluctuations within Southeast Asian markets echoed broader global fears around risk aversion, as noted by Jiang PingThe heightened risk-off sentiment has led investors to retreat from emerging markets, driven also by the U.S. administration's tariff policies and trade rhetoric, which heighten market concerns regarding global trade tensions—particularly impactful for the export-driven economies prevalent throughout Southeast Asia.

In light of these conditions, Thailand's stock exchange has undertaken various measures to stem capital outflowsThai Finance Minister Pichai Chunhavajira announced that the government intends to implement new strategies to curb the redemption of long-term equity funds, a leading factor contributing to the significant declines in the country’s stock marketThere are discussions around providing tax incentives to investors as a way to attract and retain investment capital.

Jiang Ping further analyzed Thailand's plans to extend the redemption period (T+5) as a means to alleviate outflow pressures; however, such measures may have the counterproductive effect of limiting liquidity and eroding investor confidence, prompting further disinvestment from related funds

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The high foreign institutional investment ratios across Southeast Asian markets—like in Vietnam, where it reaches 60%—underscore the necessity for policies that strike a balance between openness and stabilityLearning from Singapore's diverse economic approaches could be pivotal in navigating volatility.

Echoing similar sentiments, Wei Hongxu expressed skepticism regarding the long-term effectiveness of initial reform measures, suggesting that although they may mitigate short-term volatility and slow down declines, they are likely insufficient to reverse the prevailing market trendsHe emphasized that the fundamental economic conditions remain the primary drivers, heavily influenced by shifts in internal and external demand impacting corporate profitability and, consequently, stock valuations.

Looking to the future, experts widely acknowledge the multitude of uncertainties facing Southeast Asian stock marketsJiang Ping noted that the trajectory hinges largely on Federal Reserve policies; should the Fed enact more substantial-than-expected rate cuts in 2025, leading to a weaker dollar, the pressures of capital outflows could diminishMoreover, the pace of global economic recovery is integral to these nations, as Southeast Asian countries are heavily reliant on exportsA revived global economy stands to enhance demand for these markets, presenting potential opportunities in ASEAN export dealings with China and the transfer of Chinese supply chains into nations like Vietnam (focused on electronics manufacturing), as well as Malaysia (becoming a semiconductor packaging center).

Meanwhile, Japan's market experienced a slight pullback after a promising start early in the week that had seen three consecutive days of growthBy the end of last week, Japan’s Nikkei 225 Index recorded a modest overall increase of 0.93%, closing at 39,149.943 pointsShoichi Arisawa, a leading analyst at IwaiCosmo Securities, interpreted this market behavior as profit-taking by investors following a robust rally in previous sessions

The strength of the Japanese yen also played a role in shaping investor sentiment.

Wei Hongxu articulated that the Bank of Japan's persistent interest rate hikes could attract funds toward Japanese equities for some arbitrage opportunitiesNonetheless, he cautioned that ongoing increases in rates might eventually slow down the upward momentum of Japanese stocksMoving forward, Arisawa opined that the Nikkei index is likely to oscillate between 38,000 and 40,000 points until investors can ascertain clearer directions regarding U.S. tariff strategies.

The emergence of U.S. tariffs as a focal topic of concern within the second term of the current administration, particularly when directed towards Japan's automobile export sector, poses a risk to the Japanese financial landscapeTaro Kimura, a senior economist at Bloomberg, underscores the gravity of these tariff implications, indicating that the implications for Japan’s economy could be significant.

Similarly, the Korean financial market grapples with the effects of U.S. tariffs as it navigates volatilityIn response to substantial tariffs imposed on major trading partners, the Korean government articulated its intention to develop an "emergency export strategy", asserting a commitment to mitigating adverse impacts on the economy and the business sector.

Last Friday, Korean Acting President Choi Sang-mook reported ongoing dialogue with market stakeholders while preparing to re-evaluate the planned expiration of the stock short-selling ban in November 2023. He elaborated on a close watch over the financial markets, given the unpredictable nature of U.S. trade policies and geopolitical factors.

The removal of the short-selling ban that has been in place will likely eliminate an obstacle for South Korea to enhance its inclusion in the MSCI market classification timelineDespite MSCI's maintenance of South Korea's emerging market status during annual assessments, financial experts argue that the lifting of this prohibition is crucial for establishing a functioning market and price discovery

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