Emerging Market Stocks Attracted $45 Billion in August, but Cracks Are Appearing, Says IIF

Investors poured nearly $45 billion into emerging market equities and debt portfolios in August — the largest inflow in almost a year. However, a report by the Institute of International Finance (IIF) suggests that underlying cracks are beginning to show, as significant outflows from non-China emerging market stocks signal a shift in investor sentiment.

According to IIF data, last month’s net inflow of $44.8 billion was lower than July’s revised figure of $38.1 billion, which itself had been adjusted down from $55.5 billion to $28.2 billion in August 2024.

More than $39 billion in net investment went into Chinese debt and equities last month, while non-China emerging market stocks saw an inflow of just $13.2 billion. After three months of strong investments, non-China equities recorded a modest inflow of $7.4 billion.

“This shift represents the weakest month for emerging market equity flows since the spring and signals a significant reversal in sentiment toward markets outside China,” wrote Jonathan Fortun, senior economist at the IIF, in a statement accompanying the data.

Despite these concerns, external tailwinds could continue to support emerging market assets. Softer-than-expected U.S. inflation data has strengthened expectations that the Federal Reserve may cut borrowing costs at its meeting next week. Lower interest rates in developed economies tend to encourage investment in higher-yielding emerging markets.

Regionally, Asia attracted $18.1 billion in inflows, while Latin America added $8.9 billion, boosted in part by debt flows into Mexico and Brazil. Europe’s emerging markets drew $8.7 billion, and the Middle East and North Africa recorded $5.8 billion, according to IIF data.

“All regions saw more investment last month compared to previous periods, yet the underlying patterns still reflect China’s central role in portfolio allocations,” Fortun noted. August marked the largest inflow into Chinese equities since February.

Fortun added, “Investors are becoming increasingly sensitive to major risks and policy uncertainties, particularly in economies vulnerable to external shocks or election cycles.”