Southeast Asian markets are experiencing heightened volatility as investors increasingly redirect their funds toward China, raising concerns about the region’s largest economies, Indonesia and Thailand. Both countries have seen significant foreign equity outflows this year, while their stock markets struggle to recover.
This week, Indonesian stocks hit their lowest point in four years, although they have since regained some of the losses. The Indonesian rupiah is trading near five-year lows, and the Jakarta Composite Index extended its losses, dropping 1.2 percent on Friday. As of now, the MSCI Indonesia Index has fallen by approximately 16 percent in US dollar terms since the beginning of the year. Similarly, the MSCI Thailand Index has declined by over 12 percent in the same period.
The economic challenges in both countries have been aggravated by the ongoing global trade tensions, especially the trade war sparked by US President Donald Trump, and a shift in investment patterns within the region. Many regional fund managers are now redirecting their investments from Southeast Asia toward China. In fact, foreign investors have withdrawn a net $1.3 billion from Indonesian markets and $500 million from Thai equities in 2025, while pouring $13 billion into Chinese stocks, according to the Institute of International Finance. This shift reflects growing optimism about China’s economic recovery and its strong performance in technology stocks, particularly following the advances of the Chinese start-up DeepSeek in artificial intelligence.
According to Daniel Ng, an Asian equities investment manager at Aberdeen, it has become increasingly difficult to make confident predictions regarding Southeast Asian markets when China is regaining momentum. Chinese equities, particularly those listed on Hong Kong’s Hang Seng Index, have gained more than 20 percent this year.
Concerns about the region’s future have been compounded by potential repercussions from Trump’s tariffs. Analysts, including Trinh Nguyen, senior economist for emerging Asian markets at Natixis, warn that Southeast Asia could face economic strain from rerouted exports from China and the pressure of a weakened global trade environment.
In Indonesia, the situation is particularly dire. The country has been grappling with slowing economic growth and the expansionary fiscal policies of President Prabowo Subianto, who took office in October. The rupiah has fallen roughly 6 percent against the US dollar since his inauguration, joining the ranks of the world’s worst-performing currencies, such as the Turkish lira and Argentine peso. Furthermore, concerns about fiscal discipline are growing, especially in light of the President’s proposed $28 billion annual free meals program for schoolchildren and pregnant mothers, alongside the creation of a new sovereign wealth fund, Danantara, which has raised concerns about potential political interference.
“Investors are jittery about Indonesia, arguably more so than during the early stages of the pandemic,” said Darren Tay, head of Asia-Pacific country risk at BMI, a unit of Fitch Solutions. As political and economic uncertainty continues to mount, further outflows from Indonesian assets are expected, with analysts predicting that the risk of capital flight remains high.
In Thailand, the second-largest economy in Southeast Asia, the situation is also precarious. Thailand is grappling with sluggish consumption and private investment, compounded by one of the highest household debt levels in Asia—around 90 percent of its GDP—limiting consumer spending. The country is also vulnerable to the fallout from Trump’s tariffs, particularly given its large trade surplus with the US. Analysts at Bank of America have projected that a 10 percent tariff on Thai exports could reduce the country’s GDP by 0.2-0.3 percent.
“The economic outlook for Thailand remains challenging, with stagnation in manufacturing, a slowdown in tourism, and weak domestic demand,” analysts noted. “Without structural reforms to boost productivity and attract investment, Thailand risks falling into a low-growth trap.”
