As the US monetary tightening cycle gets underway, Asian markets face a formidable headwind, yet the structural impact will diverge sharply by country and sector.
Federal Reserve Chair Kevin Warsh announced on September 16 that the US central bank was hiking its benchmark interest rate by 25 basis points.
But even more importantly, the Fed signalled that further increases could be coming to help combat inflation that has been above the 2 percent target for over five years. Fed officials’ views, encapsulated in the so-called “dot plot”, indicate that one more rate hike is likely this year.
Markets, meanwhile, are expecting as many as three more rate hikes through the middle of next year.
This hawkish shift in monetary policy is expected to affect Asian economies and financial markets through several interconnected channels, including by spurring capital outflows, weakening domestic currencies and bumping up inflationary pressures.
But the effects should be far from uniform across the region. Higher US yields can draw global investors to dollar-denominated assets, leading to capital flight from emerging Asian markets.
During the first 15 years of this century, US Treasury yields plummeted to ultra-low levels, especially following the global financial crisis of 2008-09.
This triggered an avalanche of foreign capital into Asian equities.
However, that began to change during the COVID-19 pandemic in 2020, only to worsen following Russia’s 2022 invasion of Ukraine, which compounded inflationary pressures and helped push rates higher.
But it was the onset of the US-Israeli war with Iran this year that truly saw foreign investment flows into Asia collapse.
Driven by US 10-year yields hovering at 4–5 percent, estimated monthly foreign-equity outflows reached a record $192 billion through September 25 — far eclipsing the previous 2025 peak of $45 billion, based on data from Asian stock exchanges.
Predictably, many Asian currencies weakened significantly against the dollar during this period.
Economies with current account deficits — such as India, Indonesia and the Philippines — were hit the hardest, as they rely heavily on foreign investments to finance their trade shortfalls.
Meanwhile, the currencies of economies running current account surpluses, like China and South Korea, have appreciated.
Obviously, other factors are at play here, especially in China, which doesn’t have a freely floating currency, but the pattern still holds.
All of this suggests that if US interest rates continue to rise, the currencies of deficit economies could continue to slide further. Depreciating local currencies typically fuel imported inflation.
In the current episode, this dynamic is amplifying many other domestic price pressures impacting Asian economies, including the global energy supply shock and the El Nino weather pattern.
Deficit countries in Asia with weak currencies are, unsurprisingly, seeing some of the highest levels of inflation.
At the end of August, inflation stood at 4.8 percent in India, 3.2 percent in Indonesia, and 6.1 percent in the Philippines. These countries have also already notched multiple rate hikes this year.
Since May, Bank Indonesia has hiked rates three times by 100 basis points cumulatively, while the Philippines’ central bank has done so three times since April for a combined increase of 75 basis points.
China, Taiwan and Malaysia remain Asia’s notable inflation exceptions.
This reflects weak domestic demand in China, while Taiwan and Malaysia have enjoyed relatively stable exchange rates and tariff cuts, meaning pressure on their central banks to hike rates is virtually non-existent. Equity market valuations are also at risk across the region.
Over the past decade, three instances of rising yields in Asia have been accompanied by declines in forward price-to-earnings (PE) multiples in various Asian equity markets, as rising discount rates have mechanically dragged down valuations.
In the present episode, as the average 10-year yield in Asia rose from 3.4 percent in late October 2025 to 4.2 percent in late September, the 12-month forward PE multiple for the FactSet Asia Market Index declined from 16.7 times to 12.5 times.
This trend could clearly worsen if US rates rise more than markets currently expect. Different sectors should react differently, however.
“Long duration” equities – meaning companies whose value primarily resides far out in the future – obviously tend to see their valuations fall more due to the rising cost of capital.
Technology often falls in this category.
It’s unsurprising, therefore, that the PE multiples of the South Korean and Taiwanese markets – which are dominated by tech giants like Samsung, SK Hynix and TSMC – have declined the most during the latest US yield surge.
Soaring interest rates also jeopardize sectors dependent on high leverage or credit-driven demand.
This hits capital-intensive industries like real estate and utilities facing higher refinancing costs, alongside consumer discretionary stocks constrained by tighter household borrowing.
The most leveraged markets are the Philippines, Thailand and China, which had net debt-to-equity ratios in 2025 of 118 percent, 105 percent and 86 percent respectively, according to FactSet.
Banks and insurers, on the other hand, are usually the winners during global rate tightening cycles.
For banks, lending rates typically outpace deposit rates, boosting net interest margins.
That was evident in the 2022–23 cycle, when the average net interest margin for Hong Kong’s top 10 banks climbed from 1.41 percent to 1.65 percent.
Insurance companies, meanwhile, can keep investing their new premium income in progressively higher-yielding bonds as rates rise, typically boosting their profitability.
Markets with heavy financial weightings according to FactSet — led by Singapore at 47 percent of the market, Hong Kong at 32 percent, Malaysia at 31 percent, and India at 26 percent — stand to benefit the most from these dynamics.
As rising capital costs reshuffle Asia’s economic deck, a sharp line is being drawn between resilient, low-inflation Asian economies and those burdened by heavy deficits and spiralling inflation.
That line could deepen in the coming months.
