World capital flows to emerging market countries
World capital has begun to shift to emerging market assets again. Judging from the inflow and outflow of stocks and bonds, May may be the first positive growth in 8 months. Brazilian stocks and others are hovering in the high point area. Taking the tariff policy of the Trump administration in the United States as an opportunity, the trend of capital transfer outside the United States has started, and emerging market countries have also become an option. The expectation of a temporary pause in the appreciation of the US dollar and the expectation of central bank interest rate cuts are attracting investors’ attention.
The Institute of International Finance (IIF) counts the extent to which non-resident (overseas investors) funds are invested in stocks and bonds in emerging market countries every day, and uses it as one of the indicators to measure market psychology. As of May 22, there was a net inflow of US$10 billion. If it remains positive by the end of the month, it will be the first time since September 2024 when the Federal Reserve (FRB) decided to cut interest rates after a lapse of 3 and a half years.
Judging from the trends of stock price indices in various countries, the phenomenon of capital inflows into stocks in emerging market countries is also obvious. Brazil’s Bovespa index hit a new high on May 20. Major large-cap stocks such as Itau Unibanco Holding SA played a role in driving the market. South Africa’s all-stock index also hit a new high on May 23. The MSCI Emerging Markets Index (calculated in local currency) rose 5% from the end of last year, outperforming the global index that includes stocks from developed economies.
There are two reasons for the inflow of funds into emerging market assets. First, investors began to adjust the asset structure that was biased towards the United States. Until last year, global funds had invested in large-cap technology stocks and corporate bonds in the United States in pursuit of high returns. However, after the Trump administration came to power in the United States, concerns about the economic outlook and finances of the United States intensified, and more investors considered diversifying their assets to various regions. Europe, Japan and emerging market countries became candidates.
Second, the deepening depreciation of the US dollar is considered to be beneficial to the economies of emerging market countries. On May 19, JPMorgan Chase of the United States raised its investment rating for emerging market stocks from “neutral” to “overweight”. The reasons for adjusting the investment rating include the continued depreciation of the US dollar in the second half of 2025. Bank of America also cited reasons such as the depreciation of the US dollar in its report on May 16, pointing out that “a good opportunity has come” for assets in emerging market countries.
The US dollar index, which is an indicator of the US dollar, has been on a downward trend since 2025. Against the backdrop of investors moving away from US assets, the US dollar is more likely to be sold off than other major currencies. For governments in emerging market countries, the depreciation of the US dollar will help reduce US dollar debt, and for companies, it will also help reduce the financing costs of US dollar funds. Expectations of improved credit ratings and finances of governments and companies in emerging market countries may attract new funds.
For central banks in emerging market countries, the depreciation of the US dollar and the appreciation of their own currencies may also expand the room for interest rate cuts. In the situation of depreciation of their own currencies, central banks will remain vigilant against further depreciation of their currencies and it will be difficult to initiate interest rate cuts. This time, in the situation of moving away from the United States and causing the depreciation of the US dollar, the risk of interest rate cuts leading to currency depreciation in emerging market countries is relatively small. Inflation pressure in emerging market countries has generally declined, making it easier to support the economy through interest rate cuts.
Especially for stocks in emerging market countries, expectations of monetary easing will become a tailwind. The Central Bank of Mexico decided to cut interest rates for seven consecutive times at its monetary policy meeting on May 15. The main stock index rose 18% from the end of last year. The Reserve Bank of India (RBI) changed its monetary policy stance to “accommodative” in April, demonstrating its attitude of promoting economic growth. Supported by the expectation of easing, India’s stock index hovered near its high since the beginning of the year.
Looking at the past depreciation of the US dollar, emerging market stocks also have an advantage over developed market stocks. For example, from 2001 to 2010, against the backdrop of a decline in the US dollar index, the returns of MSCI emerging market stocks were higher than those of developed country stocks. After 2010, the US dollar showed an appreciation trend, and emerging market stocks began to be at a disadvantage. This time, with an eye on the pause in the appreciation of the US dollar and the shift to a depreciation tone, the focus on emerging market assets has increased again.
The focus in the future is whether the return of funds to emerging market assets will continue. The tariff policy of the Trump administration in the United States has brought chaos to global trade and will also affect the economies of emerging market countries. Although it can be expected to boost the economy through interest rate cuts, it is difficult to say that the economic fundamentals are rock solid.
In the revised World Economic Outlook on April 22, the International Monetary Fund (IMF) lowered its forecast for the growth rate of emerging market countries in 2025 by 0.5 percentage points from January to 3.7%. The most striking of these is the downward adjustment in trade. The export growth rate of emerging market countries fell by 3.4 percentage points, which was greater than the 0.9 percentage point drop in developed countries.
Yuta Maeda, senior economist for emerging market countries and resource-based countries at SMBC Nikko Securities, pointed out that “countries such as Indonesia and Malaysia, which are highly dependent on external demand, are at risk of economic stagnation due to tariffs.” Malaysia’s main stock price index, the Kuala Lumpur Composite Index, fell into negative territory compared to the end of last year.