Last week, the Asia-Pacific markets exhibited contrasting performances, with most Southeast Asian stock indices experiencing declines, while South Korea's stock market witnessed notable gains. This variance highlights the broader trends and regional economic sentiments that engulf the financial landscapes of these nations.

Southeast Asian equities have struggled significantly, marking three consecutive weeks of poor performance and with Indonesia's market leading the declines. For instance, the Jakarta Composite Index in Indonesia recorded a 1.54% drop over the week, closing at 6,638.46 points. In contrast, the Ho Chi Minh Index in Vietnam edged up by a slim 0.07% to finish at 1,276.08 points. Other notable movements included Thailand's SET Index, which decreased by 0.78% to 1,272.1 points, and Malaysia's Kuala Lumpur Composite Index, which managed a minor increase of 0.04% to close at 1,591.6 points. Singapore's Straits Times Index rose by 0.42% to reach 3,877.5 points, while the Philippines' Manila Index fell by 1.52% or 93.66 points, ending the week at 6,061.33 points.

The substantial downturn in Southeast Asian markets can largely be attributed to a global risk-off sentiment. Jiang Han, a senior researcher at the Pangu Think Tank, remarked that investors often retreat from emerging markets when faced with uncertainty. Additionally, various factors pertaining to economic fundamentals, policy shifts, and geopolitical situations within the region also contribute to the stock market dynamics.

On the other hand, South Korea experienced a marked uptick, particularly in its KOSPI index, which surged by 2.74% to close at 2,591.05 points. Japan's stock market, too, experienced slight gains, with the Nikkei 225 index rising by 0.93% or 362.41 points to end the week at 39,149.943 points. Similarly, Australia’s S&P/ASX200 index increased by 0.52% to reach 8,555.8 points. The KOSPI's upward trajectory, noted as two weeks of consecutive gains, has drawn the attention of investors, reflecting a renewed confidence in South Korea's economic fundamentals and an overall improvement in market sentiment.

The Indonesian stock market notably faced turbulence, enduring persistent sell-offs by global funds over nine consecutive days. The beginning of last week saw the Indonesian market decline for two days before fluctuating to ultimately close with a cumulative decrease of 1.54%. This downturn marked the third consecutive week of losses, pushing the market to a three-year low, nearing a technical bear market territory. Compared to its peak last September, the Jakarta Composite Index has plummeted over 15%.

The recovery journey for Indonesia's stock market began from a low point of 3,911 points in March 2020, climbing to a peak of 7,910 points in September 2024, only to see a recent retraction back to approximately 6,640 points, highlighting a decline of about 16% in the interim. This recent drop in value parallels the strength of the US dollar against the Indonesian rupiah, indicating a direct correlation between the dollar's rise and the outflow of global capital from Indonesia's stock market. Furthermore, the slowing economic growth, lackluster corporate earnings, and overheated valuations have contributed to the exodus of funds.

Concerns over a range of negative factors have led to accelerated net sell-offs of Indonesian stocks by foreign investors, including global trade tensions, sluggish domestic economic conditions, and apprehensions regarding expenditures on socio-economic projects by Prabowo Subianto’s administration. Analysts believe that investor worries surrounding the US dollar's strength causing the Indonesian president's campaign pledge for significant economic growth to falter compound these issues. Such factors culminate in economic challenges manifesting as stock and currency depreciation, exacerbating overall market volatility.

In light of these turbulent market conditions, Indonesia has plans to introduce short-selling mechanisms in the second quarter of this year to invigorate the stock market activity. The Jakarta Stock Exchange's initiative seeks to enhance market liquidity and effective price discovery, aiming to provide investors with more options and potentially stabilize the market. Jeffrey Hendrik, the head of development at the Indonesian Stock Exchange, emphasized that the intention behind this mechanism is to offer lucrative opportunities to investors amidst rapidly changing market dynamics.

Theodora Vinca Natalie Manik, a retail manager at Wansili Securities, expressed optimism that intraday short-selling could yield positive developments for Indonesia's capital markets. She noted that such a practice could enhance the efficiency and effectiveness of market pricing, where overvalued stocks could be realigned to fair price levels through short selling. The anticipated increase in market liquidity and trading volume is expected to follow as investors engage through short sales.

Nonetheless, it's important to recognize that allowing short-selling could also exacerbate price declines and amplify volatility risks, complicating the intended effects of stimulating the stock market. This illustrates the precarious balance regulators must maintain in fostering an attractive market environment for investors while ensuring stability in the face of potential downturns.

Meanwhile, Southeast Asian markets have been experiencing frequent fluctuations driven in part by heightened risk aversion. Concerns stemming from the US government's tariff policies and associated trade rhetoric have generated substantial anxiety regarding global trade tensions. Given that many Southeast Asian economies are export-oriented, they remain acutely sensitive to global trade policy risks.

In this context, the Thai Securities Exchange has introduced measures to mitigate capital outflows. Finance Minister Pichai Chunhavajira announced that the government would implement new strategies to curb long-term stock fund redemptions, a prominent factor contributing to the recent steep declines in the country’s equities. Possible plans include tax incentives for investors, aiming to retain capital within these long-term investment vehicles.

This initiative aims to alleviate some pressure from capital outflows, yet there are also risks involved; restricting liquidity could prompt investor jitters further, leading to an accelerated withdrawal from the market as confidence wavers. Given that foreign investment accounts for a substantial portion of Southeast Asian markets—60% in Vietnam, for example—the challenge lies in balancing openness with stability. A consideration of Singapore's diversified economic structure is suggested as a framework for smoothing out regional volatility.

These reform efforts may provide a short-term reprieve from stock market turbulence, potentially delaying declines, yet reversing the overall market trend may remain elusive. Lasting market trends are predominantly dictated by fundamental economic conditions, as fluctuations in internal and external demand shape corporate profitability, which in turn, affects valuation.

Looking ahead, experts concur that uncertainty will continue to cloud Southeast Asian stock markets. Key variables will revolve around the Federal Reserve's policies; should the central bank enact larger-than-expected interest rate cuts in 2025, it could relieve capital outflow pressures. Additionally, the pace of global economic recovery will be pivotal as many Southeast Asian nations rely on exports. A resurgent global economy would subsequently heighten demand for these countries, presenting substantial opportunities for export growth, particularly in sectors such as ASEAN-China trade and the migration of Chinese supply chains to Vietnam’s electronics manufacturing and Malaysia’s semiconductor markets.

In Japan, after achieving three consecutive days of gains, the stock market concluded lower on Friday, wrapping up the week with a marginal rise of 0.93%. Analysts noted that profit-taking behavior among investors, following a significant previous day’s upturn, alongside the strengthening yen, influenced market sentiment negatively. With the Bank of Japan’s ongoing interest rate hikes, some funds may be attracted to Japanese stocks for arbitrage opportunities. However, as interest rates continue to climb, the momentum of Japan's stock market may experience a slowdown.

Arisawa's forecast on the Nikkei's future behavior suggests that the index will fluctuate between 38,000 and 40,000 points, with breakthroughs in this band relying on the resolution of uncertainties stemming from US tariff policies. The increasingly frequent employment of tariffs by the United States has raised alarms in both the Japanese and South Korean markets. Bloomberg economist Taro Kimura indicated that if the US continues its aggressive stance towards Japan's automotive sector through tariffs, it could significantly impact Japan's economy.

Similarly, the volatility in the South Korean stock and currency markets is linked to tariff warnings from the US. In response to the imposition of high tariffs on its main trade partners, the South Korean government has announced plans for an "emergency export strategy" to mitigate potential adverse impacts on its economy and enterprises.

On Friday, Korean officials conveyed the intention to consult market participants regarding the planned repeal of the stock short-selling ban, which is set to take effect at the end of the quarter. Authorities are keen on closely monitoring the financial markets, emphasizing the heightened uncertainties due to US trade policies and geopolitical factors.

Chaired by the Financial Services Commission, Kim Byeong-hwan remarked that lifting the short-selling ban would remove a significant impediment for South Korea in pursuing an upgrade by MSCI into developed market status, a status contingent upon maintaining its emerging market status during an annual review.