Foreign investors withdrew $70.3 billion from emerging market (EM) assets in March, the deepest monthly outflow since the pandemic-driven turmoil of March 2020, according to a report published by the Institute of International Finance (IIF).
The IIF data identify emerging equities as the principal source of the net withdrawals, with emerging-market stocks accounting for roughly $56 billion of the outflows. That level of stock withdrawals, the IIF noted, is the largest recorded in at least two decades.
Outflows were particularly concentrated in emerging Asia, which absorbed nearly the entire equity side of the reversal after recording healthy inflows earlier in the year. The IIF attributed part of Asia’s vulnerability to high oil prices and to a sectoral shift tied to technology-linked equity repositioning.
The sharp shift in investor sentiment followed a geopolitical shock late in February. The outbreak of the Iran war and its rapid regional spread pushed oil prices up by about 50 percent to values above $100 per barrel, a move that reduced risk appetite among global investors and coincided with the reversal of EM asset flows.
Markets that had rallied strongly in the opening months of the year saw pronounced retracement. The IIF report cites South Korean equities as a clear example: gains near 50 percent during the first two months of the year were pared back by slightly more than one third after the regional conflict began.
While equity withdrawals were the dominant feature of March’s flows, debt movements were more constrained. Overall emerging-market debt outflows were smaller in scale, totaling $14.2 billion for the month. Within that segment, there were exceptions: China recorded $2.5 billion of inflows to its debt markets, a modest increase from the prior month, and Latin American equities continued to attract money, with inflows of $1.4 billion.
The IIF described the pattern of March flows as a sharp regime break from the ‘‘exceptionally large’’ inflows seen in January and the still-positive flows observed in February. The group characterized the month as a concentrated risk-off episode rather than a uniform, system-wide funding halt across all EM assets.
"March did not resemble a uniform, system-wide stop across all EM assets," wrote IIF senior economist Jonathan Fortun. He added that the data do not yet point to a fully generalized EM funding event.
The International Monetary Fund warned in a related observation that many emerging-market economies rely heavily on foreign financing from hedge funds, pension funds and insurance companies. That mix of creditors can leave countries exposed to swift reversals of capital flows during periods of market stress.
Fortun noted that the ultimate severity of the recent withdrawals depends on the trajectory of the regional conflict. If the Iran war proves short lived, he said, March could turn out to be the peak month of liquidation. If the conflict persists, however, a longer period of stress could deepen losses.
He outlined several factors that would complicate a rapid stabilization of flows: higher inflation readings, a delay in global monetary easing, a firmer U.S. dollar, and narrower policy room for vulnerable EM governments. Each of those conditions would make it harder for international capital to return quickly to affected markets.
Key points
- March saw $70.3 billion withdrawn from EM assets, the largest monthly outflow since March 2020; equities accounted for approximately $56 billion of the total.
- Emerging Asia absorbed most of the equity reversals, with high oil prices and technology-related portfolio shifts highlighted as drivers.
- Debt outflows were smaller at $14.2 billion, with China and Latin American equities showing pockets of inflow.
Risks and uncertainties
- Persistence of the Iran war could prolong investor risk aversion and deepen EM outflows - affecting equity markets and sovereign/credit funding across vulnerable EMs.
- Higher global inflation or delayed easing by major central banks could sustain tighter financial conditions, reducing appetite for EM assets and pressuring funding for EM governments and corporates.
- A firmer dollar and diminished policy flexibility among vulnerable EMs would hinder a quick rebound in capital flows, impacting EM debt markets and broader financing conditions.
The IIF figures paint a picture of a rapid and concentrated reversal in investor sentiment toward emerging markets in March, driven largely by an Asia-centered equity decline and a regional geopolitical shock that sent oil prices sharply higher. While some pockets of EM markets still attracted capital, the scale and speed of the withdrawals underscore the sensitivity of emerging-market financing to sudden shifts in risk appetite.