International investors withdrew a staggering $70.3 billion from emerging market investments during March, marking the most significant capital flight since the pandemic-induced selloff in March 2020, according to new data released Wednesday by the Institute of International Finance.
The massive outflow was primarily driven by investors abandoning emerging market stocks, particularly in Asian markets, though bond investments also saw withdrawals, the global banking trade group’s report revealed.
This dramatic shift represents a complete turnaround from what the IIF called “exceptionally large” investment inflows in January and continued positive flows in February. The organization characterized March’s reversal as a “sharp regime break following a major geopolitical shock.”
Stock market withdrawals alone totaled $56 billion, representing the largest such exodus in at least two decades, the data indicated.
Asian markets bore the brunt of the investment retreat, absorbing nearly all of the equity-related outflows after experiencing healthy investment inflows earlier this year. The region proved particularly susceptible to surging oil prices and “technology-linked equity repositioning,” according to IIF senior economist Jonathan Fortun.
The Iran conflict, which erupted in late February and rapidly expanded throughout the region, caused oil prices to surge 50% above $100 per barrel while diminishing investors’ willingness to take risks.
Emerging market assets, which had experienced tremendous growth over the previous eighteen months, suffered significant declines, draining capital from investment portfolios and reducing debt issuance to minimal levels. South Korean markets exemplified this volatility, climbing nearly 50% during the year’s first two months before losing more than one-third of those gains following the war’s outbreak.
The International Monetary Fund cautioned Tuesday that numerous emerging market countries now rely heavily on foreign financing from hedge funds, pension funds, and insurance companies, making them susceptible to rapid capital withdrawals during crisis periods.
Despite the massive outflows, Fortun noted that “March did not resemble a uniform, system-wide stop across all EM assets,” describing the situation instead as a “concentrated risk-off episode.”
“March data do not yet point to a fully generalized EM funding event,” Fortun explained.
Bond market outflows proved more contained at $14.2 billion and included some positive developments, such as China attracting $2.5 billion in inflows, slightly exceeding the previous month’s total.
Latin American stock markets also maintained positive momentum, drawing $1.4 billion in investments.
Should the Iran conflict prove brief, Fortun suggested, “March may end up looking like the peak month of liquidation.”
However, he warned that prolonged conflict could worsen conditions.
“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,” he concluded.
