J. Safra Sarasin: Net inflows into emerging market assets expected in 2026
21 NOV, 2025
By Mali Chivakul, Emerging Markets Economist at J. Safra Sarasin
After three years of net outflows according to the EPFR fund flow tracker—an instrument widely used in the market—emerging markets have performed better this year. Weekly bond flows have turned positive since the second quarter, and cumulative flows moved into positive territory in September.
Although timely, EPFR fund flows represent only a small part of the overall picture of portfolio flows. Quarterly aggregate flow data collected by the Bank for International Settlements (BIS)—less timely, as the latest available data refers to the fourth quarter of 2024—suggest that flows into emerging markets have been stronger than EPFR fund flows indicate. Overall bond flows were negative only in 2022, while equity flows showed greater volatility. The aggregated data also shows that flows into local-currency bonds were the strongest in the past 15 years.
In recent months, positive net inflows into emerging market assets have been driven by both global and domestic factors. On the global side, the depreciation of the U.S. dollar and the reduction in U.S. policy rates have likely been the main drivers. An empirical study conducted by BIS economists suggests that the role of the U.S. dollar as a determinant of capital flows into emerging markets is the most significant. Using quarterly data from 2010 and controlling for emerging-market domestic factors, the depreciation of the U.S. dollar against other developed-market currencies is the most important factor for capital flows into local-currency bonds and the second most important for equities. Surprisingly, these factors were not found to be relevant for hard-currency bonds. Although changes in policy rate differentials are also significant for local-currency bonds, they are negligible for equities.
The empirical evidence highlights that dollar-based investors tend to increasingly search for yield when the dollar weakens. Risk appetite rises as foreign assets in global portfolios gain value in dollar terms when the dollar depreciates relative to foreign currencies. The degree of importance of the U.S. dollar varies across emerging markets. The correlation between flows and dollar depreciation is strongest for Latin America, followed by Asian emerging markets excluding China. The correlation with flows into the EMEA region is weaker. China stands out in this context, as global conditions do not appear to influence portfolio flows in the country. Considering episodes of capital outflows during the bursting of the speculative bubble in 2015 and the Shanghai lockdown in 2022, domestic Chinese policy seems to play a far more significant role in determining portfolio flows.
For 2026, our forecasts of a slight weakening of the U.S. dollar and additional interest rate cuts by the Federal Reserve should support inflows into emerging markets. In such an environment, the high carry in several emerging markets—such as Brazil, South Africa, and Mexico—remains attractive to investors seeking yield, even though we expect these countries to cut interest rates more aggressively than the U.S. next year. We continue to expect accommodative monetary policy in emerging markets, although resilient growth and persistent inflation in some countries may slightly temper its extent. This should support an increase in flows into emerging-market local-currency bonds.
Other structural trends are also expected to support emerging market assets next year. Global investment in artificial intelligence represents a trend in which many Asian emerging markets are integral parts of the supply chains. We expect them to continue benefiting from strong demand for AI-related electronic products. Additionally, we continue to foresee gradual diversification away from U.S. dollar-denominated assets, as investors seek protection against geopolitical risks.
