Emerging Markets See Record Inflows
Despite Iran war volatility, emerging markets are seeing massive capital flows — $32B into EM equities year-to-date, putting them on track for a record annual total per Goldman Sachs. Bank of America notes record pre-war inflows to EMEA of $5.57B by Feb 25, led by South Africa ($1.58B) and Poland ($787M). South Korea is up 135.1% and South Africa 81.3% over the past year.
The massive inflows follow a stellar 2025 for emerging market equities, which saw the MSCI EM Index return 34%, nearly double the performance of the S&P 500. This momentum has continued into the new year, with the same index up 7% year-to-date as of early February. The rally has been driven by a weakening U.S. dollar, attractive valuations, and significant investment in artificial intelligence. A key driver is the divergence in growth prospects between emerging and developed nations. Emerging economies are forecast to grow around 4% in 2026, compared to just 1.5% for advanced economies. This growth is powered by strong domestic demand, which is expected to account for three-quarters of real GDP growth in these markets. Investors are also drawn to significantly cheaper valuations. Even after the 2025 rally, emerging market equities trade at a 40% discount to their U.S. counterparts based on forward price-to-earnings ratios. This valuation gap is compelling, especially as EM corporate earnings are projected to grow by as much as 29% in 2026, more than double the forecast for the U.S. The technology sector, particularly related to Artificial Intelligence, is a major catalyst. The MSCI EM Index has a technology sector allocation of over 30%, rivaling the S&P 500. East Asian economies like South Korea and Taiwan are central to the global AI and semiconductor supply chains, positioning them to benefit from massive planned investments by tech giants in 2026. In Poland, one of the top EMEA destinations for inflows, investment is being driven by strong GDP growth, its strategic role as a logistical hub for NATO and the EU, and large-scale EU funding for infrastructure and digitalization. South Africa's appeal is bolstered by a new government anchoring policy continuity, a solid trade surplus, and a rally in precious metals like gold, which benefits major producers such as Goldfields and Anglogold. The expected easing of monetary policy by the U.S. Federal Reserve is another significant tailwind. A softer U.S. dollar lowers debt servicing costs and improves financial conditions for emerging markets, historically boosting returns. This investor pivot is reflected in fund flow data. Diversified emerging-market stock funds saw a record inflow of $15.4 billion in January 2026 alone. ETFs are a popular vehicle, with the iShares Core MSCI Emerging Markets ETF (IEMG) and the iShares MSCI Emerging Markets ETF (EEM) attracting a combined $14.48 billion in just the first 28 trading days of the year. This optimism is underpinned by improving fundamentals within many emerging nations. Better policy frameworks, anchored inflation expectations, and improved credit quality have made these economies more resilient to global shocks. Eight of the ten largest emerging market sovereigns are now rated as investment-grade.
