A widening gap between equities and currencies across key Asian markets is prompting fund managers to reassess regional allocation models. The divergence has intensified since late 2025, with select markets posting strong equity returns while local currencies weaken.
- MSCI Emerging Markets Asia Index rose 12.3% YTD through January 14, 2026
- Average regional currency depreciation: 6.7% against the U.S. dollar in same period
- India: Sensex +18.4%, rupee -5.2% YTD
- Foreign institutional inflows into Asian equities: $22.6 billion in Q1 2026
- Bond market outflows in Asia: $14.3 billion in Q1 2026
- Indonesia’s rupiah fell 7.8%, Thailand’s baht declined 6.1% despite equity gains
Major international investment funds are recalibrating their Asia exposure after a pronounced disconnect emerged between stock market performance and currency movements in 2026. While the MSCI Emerging Markets Asia Index gained 12.3% year-to-date as of January 14, 2026, the average regional currency depreciation reached 6.7% against the U.S. dollar over the same period. This divergence is most pronounced in India, where the S&P BSE Sensex rose 18.4% while the Indian rupee slipped 5.2%. The structural shift is driven by capital inflows into equities from foreign institutional investors, which have surged by $22.6 billion in the first quarter of 2026, despite persistent outflows from bond markets totaling $14.3 billion. In contrast, currencies are under pressure due to elevated current account deficits and rising interest rate differentials, particularly in Southeast Asia. Indonesia’s rupiah declined 7.8% against the dollar, and the Thai baht weakened 6.1%, despite their respective stock indices advancing 10.5% and 9.3%. Fund managers are now adjusting their hedging strategies and reweighting portfolios toward markets with stronger currency fundamentals. The shift has led to increased allocation to Japan, where the yen stabilized after a 3.2% drop in 2025, and selective exposure to South Korea, where export-driven equities have supported the won. Meanwhile, funds are reducing positions in higher-risk emerging markets like Vietnam and the Philippines, where equity gains are not being matched by currency resilience. The strategic pivot is expected to influence asset flows and investment trends through the remainder of 2026, with regional bond markets likely to see renewed demand as investors seek currency stability. Market participants note that sustained divergence could trigger structural changes in how Asia is viewed within global portfolios.