Almost $95 billion was poured into exchange-traded funds (ETFs) of American shares this year, while developing-nation ETFs saw withdrawals of $8.4 billion, according to data compiled by Bloomberg. Signs of a stronger U.S. economy may prompt the Federal Reserve to begin paring its $85 billion in monthly bond purchases as soon as next month.

“The pendulum is swinging back in favor of the advanced countries,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which oversees about $130 billion. “It's one of these things that happens once a decade or so when you see a turn in relative performance. We've entered a tougher, more difficult period” for Asia.

In the past three months the MSCI Asia Pacific Index has fallen 7.4 percent, compared with a 0.7 percent decline in the Standard & Poor's 500 Index and a 0.8 percent drop in the Stoxx Europe 600 Index up to the close last week.

Yesterday, India's benchmark index dropped 1.6 percent, Indonesia's lost 5.6 percent, while Thailand's fell 3.3 percent.

Indian policy makers led by Prime Minister Manmohan Singh are battling to stem the rupee's plunge, attract capital flows to bridge a record current account deficit, and revive growth. The currency has weakened about 28 percent versus the dollar in the past two years, reviving memories of the early 1990s crisis, when the government received an International Monetary Fund loan as foreign reserves waned.

“It seems now the pain is going to be in the emerging markets,” said Nitin Mathur, an analyst in Mumbai at Espirito Santo Investment Bank who expects sectors with higher valuations such as consumer goods to suffer the biggest declines. “The problems in India are not temporary blips. The problems are much more serious, which will take a lot of effort to get resolved.”

In Thailand, the economy entered recession last quarter for the first time since the global financial crisis. Toyota Motor Corp. said last month industry-wide car sales in Thailand will fall 9.5 percent this year. The government cut its 2013 growth forecast yesterday, as exports cooled and local demand weakened, with higher household debt restricting scope for monetary easing.

Thailand's private-sector credit as a share of gross domestic product has “increased significantly” in recent years raising concern about financial stability, Krystal Tan, an economist at Capital Economics Ltd. in Singapore, said in a Bloomberg Brief commentary.

Flat to Falling Growth in China

Taiwan last week cut its 2013 growth and exports forecasts and said the global outlook for the second half is worse than in May.

“We are seeing a turning point,” said Freya Beamish, Hong Kong-based economist with Lombard Street Research, who says China's competitiveness has been hurt by labor costs that are 30 percent too high. “China's seeing flat to falling growth on our estimates, so the region's clouds are already here.”

Sentiment is also being subdued by the prospect of a decline in U.S. stimulus, money that often finds its way to export-based countries in payment for goods.

Investors will be looking for clues on how quickly the U.S. Federal Reserve will trim its $85 billion in monthly asset purchases when the Federal Open Market Committee's July meeting minutes are released on Aug. 21.

Flow Reversing

The $3.9 trillion of cash that flowed into emerging markets over the past four years has started to reverse since Chairman Ben S. Bernanke talked about a tapering in quantitative easing this year. The slowdown in Fed bond buying will probably begin next month, according to 65 percent of economists surveyed by Bloomberg from Aug. 9-13.

The JPMorgan Emerging Markets Currency Index has declined 2.4 percent since Bernanke's June 19 tapering comment. The Bloomberg Dollar Index, which monitors the greenback against 10 major currencies, has increased 0.9 percent over the same period.

“The emerging Asia story is crumbling, and dollar is once again the king,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai.

India's moves to tighten cash supply, restrict currency derivatives, and curb gold imports since July have failed to arrest the rupee's slump to record lows. The deficit widened to an unprecedented 4.8 percent of GDP in the year ended March 31. The government aims to narrow the gap to 3.7 percent, or $70 billion, this year, Finance Minister Palaniappan Chidambaram said Aug. 12.

India's slump is worse than elsewhere in Asia because the country has failed to carry out long-overdue structural changes to the economy, said Pan at Kotak Mahindra Bank.

“In India, we have great policies on paper, but the gap between the what's on paper and the implementation is unduly large,” R.C. Bhargava, chairman of Maruti Suzuki India Ltd., the nation's biggest carmaker by volume, said in an interview. “If we just implement what's already there, we can get back on track in the next two to three years.”

Richard Jerram, chief economist at Bank of Singapore Ltd., says the market declines reflect overly ambitious expectations rather than fundamental weakness in the economies.

“There's a good structural story based on the underlying domestic demand,” said Jerram, who has analyzed Asian economies for two decades. “What you see at the moment is reaction from expectations being unrealistically positive maybe 12 months ago, to now becoming more realistic.”

Momentum Slowing

One bright spot is Japan, which has seen its economy bounce back on Prime Minister Shinzo Abe's fiscal and monetary stimulus. The Topix stocks index has risen 34 percent this year.

Abe has yet to show that he can sustain the recovery by restructuring company and labor laws and taming the nation's debt, which topped 1 quadrillion yen ($10 trillion) in June.

“Asia still has potential in the next three years or more, but in the shorter term, momentum for business is slowing down,” said Shuichi Hirukawa, senior fund manager at Mizuho Asset Management Co. in Tokyo. “Investors may become more cautious.”

China's economy last quarter extended the longest streak of expansion below 8 percent in at least two decades, curbing earnings at companies such as Hong Kong-based Cathay Pacific Airways Ltd. Still, there are signs of improvement. Industrial output rose more than economists estimated in July, after larger-than-forecast rebounds in exports and imports, and improvement in gauges of manufacturing and service industries.

China is making efforts to bolster confidence. Overall liquidity in China is ample, as banks channel more funds to agriculture and small businesses in the world's second-largest economy, People's Bank of China Governor Zhou Xiaochuan said on state broadcaster China Central Television yesterday.

Still Stronger

“Some Asian countries, especially India, have their own significant domestic challenges,” said Jim O'Neill, the former Goldman Sachs Group Inc. economist who coined the term BRIC in 2001 to describe Brazil, Russia, India and China. “But China is slowing primarily to improve its growth model, and at 7 to 7.5 percent annual growth is still delivering $1 trillion nominal GDP. And Japan, still Asia's No. 2 economy, is looking better than it has done for a very long time.”

The slowdown in economies such as Indonesia and Thailand is part of a “very, very global” weakness, World Bank Chief Economist Kaushik Basu told reporters in New Delhi yesterday.

The U.S. recovery “was so slow that even the slightest pick up is looking like a pick up,” Basu said. “I don't think the Asian situation is any worse. In fact, if anything, Asia is probably better off than the rest of the world.”

That underlying strength may not help markets in the region as money continues to flow back to Europe and the U.S. as global investment rebalances, said Oliver at AMP Capital.

“Asia will still be a stronger part of the world than the U.S. or Europe, but compared to people's expectations, Asia is likely to come in a little bit lower than expected, and Europe and the U.S. are probably set to surprise a little bit on the upside,” he said.

Developing Asia will grow 6.9 percent in 2013, the IMF said in July, cutting its forecast by 0.3 percentage point. That compares with a global expansion forecast of 3.1 percent and projected growth of 1.2 percent in advanced economies.

Investors will be scanning data from Chinese factories to Malaysian growth this week for further signs of weakness.

An Aug. 22 flash reading for China on a manufacturing purchasing managers' index by HSBC Holdings Plc and Markit Economics is expected to come in at 48.1 for August, from 47.7 in July, according to the median economist estimate compiled by Bloomberg. A reading below 50 indicates contraction.

Malaysian Data

Malaysia's central bank on Aug. 21 may post data showing 4.7 percent economic growth in the second quarter from a year earlier, after rising 4.1 percent in the January-March period, its slowest rate since September 2009, according to the median estimate of economists in a Bloomberg survey.

Pressure to raise interest rates to support currencies would hit consumers in countries such as in the 10-member Association of Southeast Asian Nations, where cheap mortgages and easy credit have fueled housing booms.

“Southeast Asian consumers have taken on much higher debt in the last few years,” Royal Bank of Scotland Group Plc analyst Sanjay Mathur wrote in a July 18 report. He said the largest increase was in Malaysia, where household debt increased by 20 percent of GDP between 2008 and 2012.

There's a feeling that “the rest of the world's getting a bit better and Asean's had its sort of burst of credit-enhanced growth,” said Edward Teather, an economist at UBS AG who covers Southeast Asian markets from Singapore. “It's raining already.”

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