Foreign investors return to Asia funds, some fears remain

HONG KONG/SEOUL, Aug 10 (Reuters) Foreign investors are returning to Asia funds again after the sell-off in May triggered redemptions, boding well for the region's stock markets.

A pause in U.S. interest rate hikes is expected to shore up markets further, but don't expect a resumption of the frenetic buying seen in the first quarter, analysts say. Worries about a slowing U.S. economy, record oil prices and the risk of another Fed move are tempering investor enthusiasm.

''Inflation risks remain, it will take a while for investors to be sure the U.S. will have a soft and not a hard landing, the oil price remains a threat and the period out to October is often poor for shares,'' said Shane Oliver, head of investment strategy at AMP Capital Investors.

According to Citigroup, US8 million worth of fresh money flowed into Asian equity funds in the week ended Aug. 2 with China, India and Thailand attracting interest.

This followed a brutal selloff from mid-May to mid-June where total redemption from Asian equity funds amounted to US.9 billion, or about 30 percent of the money that poured into Asian funds excluding Japan from January to mid-May, Citigroup said.

Worries about higher U.S. interest rates and inflation had triggered heavy selling, sending the MSCI ex-Japan index down nearly 20 percent to a 6-{ month low on June 14 from a record high on May 8.

Since then, however, the region has rebounded about 10 percent from the low.

The U.S. Federal Reserve left interest rates unchanged at its Aug. 8 meeting, breaking a string of 17 rate hikes, and said further action depended on the outlook for growth and prices.

''Of course there was some profit taking from our Asia funds,'' said Leo Cheung, head of direct sales and investor services at JF Asset Management, part of JPMorgan Asset Management, which has over 8 billion of assets under management.

But in times of market turbulence, investors tend to switch to more conservative funds, such as money market funds, taking on less risk as they wait for opportunities to buy, he added.

''In the last few quarters, investors liked to invest in emerging markets like India, Eastern Europe and other high risk countries. But now they've switched to more conservative portfolios.'' ''I don't see the trend turning very negative. Most of them have plans to go back to emerging markets later this year.'' The selling had been particularly fierce in South Korea, which saw foreign investors sell a net 8.6 trillion won (.91 billion) since May as of Wednesday, contributing to a 5 percent fall in the KOSPI that has made it the worst performer among major regional markets so far this year. Foreign investors make up nearly 40 percent of the market.

This was in contrast to last year's performance where a surge in money from mutual funds owned by domestic retail investors helped lift the market by nearly 54 percent, making South Korea the best-performer among major Asian markets.

''For Korea and for emerging markets the risks have decreased now that the Fed has stopped raising interest rates,'' said Choi Yong-kyu, a fund manager at IBK SG Asset Management.

''Foreign investors have been big sellers until now, but I expect the selling trend to slowly abate,'' he added.

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