Asian equity markets experienced a notable resurgence in foreign investment during May 2025, marking the largest monthly net inflow in over a year. This influx of capital follows a period of heightened investor caution sparked by concerns over the potential economic repercussions of increased U.S. tariffs. The easing of immediate tariff threats, notably through a 90-day pause agreement on reciprocal tariffs announced by U.S. President Donald Trump, has encouraged a return of foreign investors who had previously withdrawn substantial positions from key Asian markets. This shift highlights renewed confidence in the region’s growth prospects despite ongoing geopolitical and trade uncertainties.

Significant Foreign Capital Flows into Asian Markets

Data from the London Stock Exchange Group (LSEG) indicates that foreign investors purchased approximately $10.65 billion worth of equities across several major Asian economies, including India, Taiwan, South Korea, Thailand, Indonesia, Vietnam, and the Philippines during May. This marks the largest monthly net foreign equity purchase since February 2024, effectively reversing four consecutive months of net foreign selling. The return of foreign capital to these markets underscores a recalibration of risk perceptions amid improved trade dialogue and the suspension of some tariff escalations.

The surge in foreign inflows was led primarily by Taiwan and India. Taiwan saw $7.28 billion in net foreign purchases, representing the largest cross-border equity inflow since November 2023. Indian equities also attracted substantial foreign interest, with a net inflow of $2.34 billion, the highest since September 2024. Other markets in the region, including South Korea, Indonesia, and the Philippines, received foreign net inflows of $885 million, $338 million, and $290 million, respectively. Conversely, Thailand experienced a net outflow of $491 million, reflecting localized selling pressure amid broader regional optimism.

Highlights:

Foreign investors infused approximately $10.65 billion into Asian equities in May 2025.
Taiwan and India led the inflows with $7.28 billion and $2.34 billion, respectively.
Thailand was the only major market to experience net foreign selling, with $491 million outflows.

Impact of U.S. Tariff Policies on Investor Sentiment

The initial announcement of reciprocal tariffs by President Trump in early April 2025 had heightened fears about the potential adverse effects on Asian exporters. Concerns centered on the possible erosion of exporter profit margins, disruption of regional supply chains, and slower export growth due to escalating trade barriers. These anxieties contributed to foreign investors reducing their exposure to the region in the months leading up to May.

However, a temporary 90-day pause on tariffs for most countries, declared later in April, alleviated immediate concerns. This pause was pivotal in restoring investor confidence and prompted a reassessment of Asian market fundamentals. The decision provided a window of stability that allowed markets to refocus on underlying economic growth trends and corporate earnings prospects rather than short-term trade policy risks.

Highlights:

April tariff announcements initially triggered foreign investor withdrawals due to export and supply chain concerns.
A 90-day tariff pause eased fears and encouraged renewed investment in Asian equities.
The temporary truce in trade tensions allowed markets to recalibrate toward economic fundamentals.

Upgraded Earnings Forecasts and Sectoral Drivers Fuel Optimism

Supporting the renewed investment appetite, Goldman Sachs revised upward its earnings growth projections for the MSCI Asia Pacific ex-Japan Index (MXAPJ). The brokerage now forecasts earnings growth of 9% for both 2025 and 2026, representing a 2-percentage-point and 1-percentage-point increase, respectively. This optimism is anchored in expectations of stronger macroeconomic growth in China and U.S.-exposed Asian markets.

Additionally, significant investments related to artificial intelligence (AI) have been identified as key growth drivers. Saudi Arabia’s $600 billion investment in AI initiatives spanning U.S. firms is anticipated to benefit technology-centric economies such as Taiwan and South Korea. However, Goldman Sachs also notes that these gains could be partially offset by a weaker U.S. dollar, which traditionally impacts export competitiveness and foreign earnings translation for regional companies.

Highlights:

Goldman Sachs raised earnings growth forecasts for MSCI Asia Pacific ex-Japan to 9% for 2025 and 2026.
Macro growth prospects in China and U.S.-linked markets underpin earnings optimism.
AI-related investments worth $600 billion are expected to boost Taiwan and South Korea’s technology sectors.

Regional Market Performance and Year-to-Date Comparisons

Despite the volatility experienced in the first half of 2025 due to geopolitical and trade-related uncertainties, the MSCI Asia-Pacific Index has delivered a robust performance. Year-to-date, the index has risen approximately 8.8%, significantly outperforming the MSCI World Index, which is up 5.4%, and the S&P 500 Index, which has posted a more modest gain of 0.98%. This relative strength reflects the region’s resilience and the growing appeal of Asian markets amid a global environment marked by cautious optimism.

Markets such as Taiwan and India, buoyed by substantial foreign inflows and supportive earnings revisions, have emerged as key beneficiaries of this trend. The contrast with Thailand’s net foreign outflows indicates that while overall sentiment has improved, investors continue to differentiate between markets based on local conditions and risk factors.

Highlights:

MSCI Asia-Pacific Index gained 8.8% year-to-date through May 2025.
The index outperformed the MSCI World Index (+5.4%) and S&P 500 (+0.98%).
Taiwan and India stand out as primary recipients of foreign capital inflows.

The resurgence of foreign investment into Asian equities in May 2025 signals a broader shift in investor sentiment, influenced by both easing trade tensions and positive macroeconomic factors. Market participants will closely monitor ongoing trade negotiations and economic data as they recalibrate portfolios to capitalize on the region’s evolving opportunities and risks.