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New Delhi: Investor appetite for emerging markets is beginning to broaden, with fresh allocations flowing across a wider set of geographies. According to EPFR Global, diversified global emerging market (EM) equity funds continue to witness steady inflows, while India-focused funds — after five consecutive weeks of outflows — have returned to positive territory.
Cameron Brandt, Director of Research at EPFR Global, described the latest data as an early sign of a possible turnaround. “Flows into diversified global emerging market funds have been consistent, which is usually the precursor for liftoff, but it still hasn’t quite happened yet,” Brandt said, pointing to cautious optimism among investors.
India Back in Focus After Prolonged Outflows
The return of inflows to India-focused funds comes after a sustained stretch of weakness in sentiment. The previous five weeks had seen investors trim exposure, reflecting concerns over valuations, oil price volatility, and global risk-off mood driven by rising US yields.
The fresh inflows indicate that India’s resilient growth outlook and corporate earnings strength are once again attracting foreign investors. With GDP expanding at 7.8% in Q1FY26 — the fastest pace in five quarters — and inflation showing signs of moderation, analysts believe India is regaining its relative appeal among emerging market peers.
Market strategists highlight that India’s structural growth story, reforms in taxation and infrastructure, and steady domestic consumption continue to provide a strong long-term narrative. While volatility may persist due to global macro conditions, flows turning positive after weeks of pressure suggests a renewed willingness to participate in the India growth story.
China Draws Tentative Interest, But Far from Exceptional
China has also seen renewed, albeit modest, interest from global investors. According to Brandt, inflows into China-focused funds have picked up slightly but remain well below levels that would indicate a meaningful shift. “The inflows are still far from exceptional,” he noted, adding that concerns around property sector stress, local government debt, and uneven post-pandemic recovery remain key headwinds.
Interestingly, the once-popular ex-China fund group — which saw strong momentum last year as investors sought EM exposure while avoiding China — has witnessed outflows in recent weeks. “One was growing quite aggressively last year and still adding new funds, but not seeing much fresh money,” Brandt said. This shift underscores investor hesitancy in maintaining a sharp overweight on ex-China strategies, possibly reflecting an attempt to rebalance EM allocations more broadly.
Broader Emerging Market Trends
Flows into diversified emerging market funds are being closely watched because they often serve as a leading indicator for risk-on sentiment in global markets. Historically, consistent allocations to these funds precede stronger inflows into country-specific vehicles as investors gain confidence.
At present, while the numbers are encouraging, Brandt cautioned that the much-anticipated “liftoff” in EM flows has not fully materialised. Persistent global uncertainties — from oil market dynamics and US interest rate trajectory to geopolitical tensions — continue to temper risk appetite.
Developed Markets: Inflows Continue, But With Nuance
The latest EPFR data also sheds light on trends across developed markets:
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United States: US equity funds continue to attract inflows, though at levels that trail the robust rebound in major indices this summer. Despite the S&P 500 and Nasdaq posting strong gains, investors appear to be adopting a measured approach, mindful of stretched valuations and evolving Federal Reserve policy.
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Europe: European fund flows turned positive again after a brief pause. However, Brandt highlighted lingering caution, with investors weighing the impact of fiscal uncertainties, the ongoing Ukraine conflict, and rising bond yields. Rotation within European equities remains uneven, with defensive sectors attracting more consistent interest.
The Balancing Act for Global Investors
For global portfolio managers, the challenge remains balancing the appeal of emerging markets’ growth potential against the stability of developed market assets. The latest data suggests investors are beginning to diversify beyond narrow regional bets, moving capital into broader EM vehicles and selectively returning to India after weeks of hesitation.
Still, risks remain. Rising bond yields globally could cap flows into riskier asset classes, while geopolitical shocks or commodity price spikes may quickly alter sentiment. For India specifically, sustained inflows will depend not just on macroeconomic momentum, but also on maintaining reforms, fiscal prudence, and global investor confidence in corporate governance standards.
Outlook: Signs of a Slow, Selective Shift
Analysts interpret the current trends as the early stages of a potential broad-based EM revival, albeit one that is still fragile. If global liquidity conditions ease and risk appetite strengthens, India stands to be a major beneficiary given its robust fundamentals.
For now, the takeaway is clear: after weeks of strain, India-focused equity funds are back in the green, diversified EM funds remain steady, and investors are cautiously broadening their exposure — a sign that while global uncertainties persist, the search for growth opportunities is quietly regaining momentum.
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