Aug 17 (Reuters) – War, tariffs and AI gyrations have done little to dent the flow of cash into emerging markets, as reforms, deeper local capital markets and diversification away from U.S. assets reshape the asset class
Global shocks that once triggered sharp sell-offs across developing economies have failed to derail investor demand this year, with emerging market debt inflows at a more than two-decade high and governments issuing record amounts of bonds.
Improved policymaking, stronger foreign exchange reserves and growing domestic investor pools have helped cushion countries from the shocks.
“Roughly from 2015 to 2025 was like the valley of tears for emerging markets: strong dollar, U.S. exceptionalism, lots of crises, defaults, COVID, etc,” said David Hauner, head of emerging markets fixed income strategy at Bank of America.
But those dire straits paved the way for the current rebound.
“There was so much outflow, a few months of inflows are not going to compensate for that…it’s still only scratching the surface of the under-investment that has occurred over the past decade.”
The war, which began in February, has largely closed the key Strait of Hormuz passage and boosted global oil and fertiliser prices, feeding through to food prices and wider inflation.
Meanwhile concerns linger that the U.S. Federal Reserve could raise interest rates — strengthening the dollar at the expense of many emerging market currencies. U.S. Treasury yields — the basis on which emerging market borrowing costs are priced — are near multi-year highs.
But so far, the turmoil has not derailed investor interest.
“We can see the fundamentals weakening in the developed world,” said Jetro Siekkinen, head of emerging market fixed income with LGT Capital Partners, pointing to debt-to-GDP ratios.
Emerging markets, in contrast, have spent years beefing up central bank independence and foreign currency reserves. Many, including Pakistan, Ghana, Ecuador, Nigeria and Argentina, earned credit-rating upgrades.
“The diversification (away from U.S. Treasuries) I think is driving this latest performance of emerging markets and frontier as well,” Siekkinen said.
Foreign capital flows back those views.
Institute of International Finance figures show foreign investors plowing $214.4 billion into emerging market debt through July, up from $177.7 billion in the same period last year.
Emerging market nations also sold roughly $19 billion of bonds in July, twice the average for the month over the past decade, putting year-to-date issuance at a record $187 billion.
