Emerging markets see biggest outflows since 2020 amid Asia sell-off

Foreign investors withdrew a staggering $70.3 billion from emerging market assets in March, marking the largest monthly outflow since the market turmoil of March 2020, according to data released by the Institute of International Finance on Wednesday.

The data showed that investors pulled funds from both debt and equity portfolios, reflecting a sharp reversal in sentiment.

The shift, the organisation noted, represents a “sharp regime break following a major geopolitical shock.”

Equity markets bear the brunt

The bulk of the outflows occurred from equity markets, particularly in Asia.

Investors withdrew $56 billion from emerging market stocks in March, the largest equity outflow recorded in over 20 years.

The scale of the withdrawal underscores the speed at which sentiment deteriorated during the month.

Asia at the centre of the sell-off

The report highlighted that emerging Asia absorbed nearly all of the equity-driven losses, following a period of strong inflows earlier in the year.

Jonathan Fortun, IIF senior economist, noted in the report that the region’s vulnerability was exacerbated by high oil prices and “technology-linked equity repositioning.”

The geopolitical trigger behind the reversal was the Iran war, which began in late February and quickly spread across the region.

The conflict led to a 50% surge in oil prices, pushing them above $100 per barrel and dampening investor appetite for risk.

Market gains reversed as sentiment weakens

Emerging market assets, which had performed strongly over the preceding years, saw a sharp pullback.

Capital exited EM portfolios, and a previously robust pipeline of debt issuance slowed significantly.

South Korean equities illustrated the volatility.

After gaining nearly 50% in the first two months of the year, the market shed more than one-third of those gains following the onset of the conflict.

Meanwhile, the International Monetary Fund said that many emerging economies are increasingly reliant on foreign financing from hedge funds, pension funds, and insurers.

This leaves them more exposed to rapid capital outflows during periods of instability.

Debt markets show relative resilience

While equity markets experienced severe outflows, debt markets proved somewhat more resilient.

Total debt outflows stood at $14.2 billion, significantly lower than equity losses.

There were also pockets of strength.

China recorded inflows of $2.5 billion, slightly higher than the previous month, while Latin American equities remained in positive territory with inflows of $1.4 billion.

Despite the scale of the outflows, Fortun emphasised that the situation does not yet reflect a broad-based funding crisis.

"March may end up looking like the peak month of liquidation", Fortun wrote.

However, the outlook remains uncertain.

Fortun cautioned that if the geopolitical tensions persist, conditions could worsen.

He also stated that “Higher inflation, delayed easing in global financial conditions, a firmer dollar, and reduced policy flexibility across vulnerable EMs would all make it harder for flows to stabilize quickly.”