Foreign investors pull out $26.3 billion from emerging markets in September as hawkish Fed pushes US Treasury yields higher

In September, foreign investors withdrew $26.3 billion from emerging-market stocks and bonds, the first monthly outflow since June, according to the Institute of International Finance. The departure was driven by a hawkish Federal Reserve, which raised interest rates for the first time since 2023, leading to higher US Treasury yields and a stronger dollar.

This move prompted investors to shift away from riskier assets. Non-resident investors pulled $7 billion from emerging-market fixed-income assets, resulting in the first net outflow since March, when Middle East tensions unsettled global markets. The pressure on emerging markets intensified in the second half of the month, as hard currency bond funds turned to outflows and the EM dollar credit spreads widened.

Looking ahead, the Federal Open Market Committee's continued projected interest hikes, combined with the Bank of Japan at its highest rate since 1995 and overall tightening across advanced economies, pose increasing challenges for emerging market carry into the fourth quarter. South Korean equities saw a heavy $19.2 billion outflow, driven by a 62% rise in the KOSPI this year.

While foreign selling of Korean stocks has been ongoing throughout the year, its September peak came after strong performance. The retreat in foreign investment coincided with waning enthusiasm for the artificial-intelligence-driven technology rally that had boosted several Asian markets in 2023. Overall, fixed-income outflows occurred across all regions in September, though the asset class still attracted $246 billion from foreign portfolio investors so far this year.

Equities, on the other hand, experienced year-to-date outflows of $113.9 billion, compared to $27.3 billion during the same period last year. Excluding China, equity outflows totaled $151.5 billion.