Foreign capital flows into emerging markets cooled in February, with non-resident investors adding a net $21.7 billion to portfolios, according to data published by the Institute of International Finance (IIF). The total marks a marked slowdown from January’s unusually large $100.5 billion inflow and is below the $45.5 billion recorded in February of last year.
The IIF framed the drop as a normalization after an exceptionally strong start to the year rather than evidence of a broad shift in investor appetite. As the IIF put it, "The month-to-month slowdown is ... best read as a normalization after an outlier January print," Jonathan Fortun, senior economist at the IIF, said in the report.
Allocation between asset classes remained tilted toward debt in February. Non-resident investors directed a net $14.3 billion into emerging market debt, while equity inflows slowed to $7.4 billion from $28.0 billion in January.
The February snapshot predates a deterioration in global risk sentiment driven by the U.S.-Israeli war on Iran. That escalation and its regional spread in the Middle East prompted a pullback from emerging markets and other risk assets in the opening days of March. The IIF also flagged South Korea as an area of weakness in February flows; since then, South Korean equities have experienced particularly steep losses even though the benchmark KOSPI remains strong on a year-to-date basis.
Regional and market detail
Debt inflows in February were dispersed across regions. Asia attracted $5.9 billion, Latin America drew $4.3 billion, emerging Europe received $2.6 billion, and the Middle East and North Africa took in $1.5 billion. Within that total, China’s debt market saw $400 million of inflows in February following stronger investment in January, while emerging markets excluding China captured $13.8 billion.
That pattern indicates continued investor interest in higher-yielding markets outside China, the IIF noted, even as volatility and uncertainty in global markets have increased.
Equity flows were positive overall but uneven by region. China-focused stocks attracted $5.2 billion in February, while emerging markets excluding China added $2.2 billion. On a regional basis, Latin America led equity allocations with $6.9 billion. Emerging Europe and the Middle East and North Africa also posted smaller equity inflows. By contrast, Asian equities as a whole recorded net outflows, with selling in markets such as South Korea offsetting inflows elsewhere.
Investor behavior and market drivers
The IIF said local-currency bond markets continued to draw investors seeking relatively high yields in countries where exchange rates and policy frameworks have been comparatively stable. A softer dollar earlier in the year also supported returns in both local- and foreign-currency debt, boosting carry and total returns for some emerging-market fixed-income instruments.
Reflecting the more selective stance of international investors, the IIF observed that flows are becoming increasingly differentiated. "In this environment, flows are likely to remain broadly resilient but increasingly differentiated, with balance sheet strength, policy credibility, and market depth playing a growing role in shaping investor allocation decisions," Fortun said.
Even as inflows persisted in February, the IIF highlighted episodes of localized stress. Late in the month, Indonesia experienced a sudden bout of outflows from both equities and sovereign bonds tied to domestic market concerns. The IIF described the episode as localized and noted that it did not spread across other emerging-market assets.
Overall, February’s figures point to steady but discerning investor interest in emerging markets, with debt markets and specific regional opportunities drawing the most capital amid evolving global risk conditions.