(Bloomberg) -- The strong appetite for Southeast Asia stocks seen over the past year is starting to ebb as the reopening of China draws global funds to cheaper northern markets. 

An analysis of Asian mutual fund positions in November by HSBC Holdings Plc showed they cut exposure to the biggest overweight markets of Indonesia and Singapore, while increasing allocations to Taiwan and Hong Kong. Vietnam and Thailand were the only Southeast Asian markets that foreign investors net bought in December, Bloomberg-compiled data showed.

A confluence of factors, including resilient local currencies and fairly benign inflation, brought international investors to the region which usually makes up only a small part of global portfolios. That may change this year as China eases its Covid restrictions and the potential bottoming out of tech earnings gives Taiwan and South Korea a boost. 

“Interest in China and North Asia is picking up, partially because of the reopening of mainland China,” said Herald van der Linde, head of Asia equity strategy at HSBC. “That might be financed, partially, from holdings in Southeast Asia.”

A switch out of Southeast Asia would call an end to some of the record inflows last year. Both Indonesia and Thailand posted all-time high foreign purchases of their stocks, helped by skyrocketing commodity prices and a revival in tourism. Foreigners also bought Malaysian equities on a net basis after four years, while Vietnam saw its highest inflows since 2018.

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While Southeast Asia’s economies remained resilient, any further good news appears to be largely priced in. Additionally, ongoing inflationary pressures and slowing global demand could threaten growth prospects in 2023.

Manufacturers in the region are still under pressure as activity continued to contract and barring Thailand, which is boosted by a pickup in tourism, real gross domestic product is forecast to slow across Southeast Asia this year.

After outperforming most other measures in Asia in 2022, Indonesia’s stock gauge is close to entering into technical correction, falling as much as 2.7% Thursday. Indonesia’s “fundamentals remain strong but other Asian markets might attract buyers due to cheap valuations with higher earnings-per-share growth,” said Andre Benas, head of research at BCA Sekuritas.

A slowing world economy will especially hurt shares in Vietnam — a key exporter in the region — and bodes ill for the dong, which was among the top performers in Asia in 2022.

“The VND is still fairly expensive on a real-effective exchange rate basis and my sense is that the general outlook for the economy’s prospects this year are overly optimistic,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics Ltd. 

--With assistance from Fathiya Dahrul.

(Adds analyst comment on Indonesia in eighth paragraph.)

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