Emerging markets (EM) saw a substantial net inflow of $15.9 billion in non-resident portfolio flows in February, continuing the trend of divergence between debt and equity markets that has characterized recent months. According to the “Capital Flows Tracker – March 2025” report by the Institute of International Finance, debt markets remained strong, while equities faced significant challenges.
Debt inflows remained resilient, recording $18.1 billion, indicating continued investor preference for fixed income amid global uncertainty, while equities struggled with a $2.1 billion outflow. This shows a clear preference for safer, income-generating assets in the face of geopolitical tensions and monetary policy uncertainties that are currently affecting global markets.
A standout performer in the emerging markets landscape in February was China, which saw $11.2 billion in equity inflows. This result underscores China’s decoupling from broader EM equity trends, where other markets, including India, South Korea, and Taiwan, experienced continued capital outflows. The influx of capital into China reflects investor confidence in the country’s market, despite the broader global uncertainty and economic concerns affecting many emerging economies.
However, the broader picture for EM equities was not as optimistic. While major indices in developed markets posted solid gains, the MSCI Emerging Markets Index rose only 2%, underperforming the MSCI World Index, which gained 4%. The lack of strong performance in EM equities is partly due to persistent investor caution, particularly in markets outside of China, which are struggling with trade tensions, weak earnings expectations, and geopolitical risks. For instance, outflows from India, South Korea, and Taiwan intensified due to concerns over trade restrictions and uncertain economic growth prospects in the wake of strained global supply chains.
In contrast to equities, debt flows into EM countries were notably robust. Local currency debt, in particular, remained in high demand, bolstered by favorable yield differentials when compared to advanced economies. Sovereign and corporate bond issuances, especially in Latin America and the Middle East, saw strong activity, driven by relatively stable policy environments and the global demand for higher-yielding assets. Mexico and Saudi Arabia led sovereign debt issuance, while Brazil and Chile attracted strong demand for corporate bonds, capitalizing on improved market conditions.
Notably, China’s equity inflows stood in stark contrast to broader EM equity trends. Despite global uncertainty, renewed optimism in sectors like technology, particularly AI and semiconductors, helped drive investor interest in Chinese markets. Nevertheless, caution around regulatory risks and geopolitical concerns still looms over the Chinese market, dampening the outlook for sustained inflows into equities.
Looking ahead, the outlook for EM capital flows will remain highly sensitive to the Federal Reserve’s monetary policy and broader macroeconomic developments. The Fed’s messaging signals that interest rates may stay elevated for longer than previously expected, dampening risk appetite for EM assets. The strong U.S. dollar continues to weigh on EM equities and foreign exchange markets, particularly in Asia, as investors remain cautious in the face of macroeconomic headwinds.
While equity markets in emerging economies struggle, the demand for EM debt remains resilient, with investors showing a preference for local currency bonds in countries with stable policy frameworks. The outlook for EM debt remains positive, as debt markets continue to outperform equities in the short term, according to the report. The continued strength of debt flows suggests that, in a climate of global uncertainty, investors are prioritizing security and income generation over potential equity market gains.