Global Market: EMs see first foreign outflow since June as Fed turns hawkish

Foreign investors withdrew $26.3 billion from emerging market stocks and bonds in September, marking the first monthly outflow since June, as a hawkish U.S. Federal Reserve pushed bond yields and the dollar higher, according to an Institute of International Finance (IIF) on Wednesday, Reuters reported.

Foreign investors pulled $7 billion from emerging market fixed-income assets during the month, the first net outflow from the asset class since March, when escalating tensions in the Middle East unsettled global financial markets.

Read more: Global Market: South Korean stocks decline as Samsung falls, oil prices fuel inflation fears

Emerging markets came under renewed pressure in September after the Federal Reserve, led by Kevin Warsh, raised interest rates for the first time since 2023 and signalled that inflation remained a concern. The Federal Open Market Committee's decision sent U.S. Treasury yields sharply higher and boosted the dollar, reducing the appeal of riskier emerging-market assets, Reuters reported.

The IIF said pressure on emerging-market assets intensified in the second half of September, with hard-currency bond funds seeing outflows around the Federal Reserve's policy decision and spreads on emerging-market dollar credit widening.

The institute also warned that a hawkish Fed under Warsh, further policy tightening by the Bank of Japan and broader monetary tightening across advanced economies could make emerging-market carry trades less attractive in the fourth quarter.

Read more: Global Market: Japan stocks fall for second day as profit-taking, rate fears weigh

Emerging-market equities bore the brunt of the foreign selling, with outflows reaching $19.2 billion in September. Heavy selling of South Korean stocks accounted for a significant portion of the decline, the IIF said.

Foreign investors have been selling South Korean equities for much of the year, with September marking the peak of that selling after the benchmark KOSPI had surged 62% in 2026, according to the IIF.

The retreat from Asian equities also coincided with a cooling of the artificial intelligence-driven technology rally that had lifted several regional markets earlier in the year. Investors took the opportunity to lock in gains in highly valued chip and technology stocks.

Fixed-income assets saw outflows across all emerging-market regions in September, although the asset class remained firmly in positive territory for the year. Foreign portfolio investors have poured $246 billion into emerging-market bonds so far this year, the IIF said, Reuters reported.

The outlook for emerging-market equities, however, has deteriorated sharply. Year-to-date foreign outflows from emerging-market stocks have reached $113.9 billion, compared with $27.3 billion during the same period last year.

Excluding China, the equity outflow has been even larger at $151.5 billion, highlighting the extent of foreign investor pressure on emerging-market stocks outside the world's second-largest economy.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)
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