The latest research from Elara Capital indicates that the AI and commodity-driven trades that have significantly influenced emerging market flows since April 2025 are beginning to show signs of fatigue. With a global rotation in markets gradually slowing, India’s outflow pace has moderated, as evidenced by recent trends.
Emerging markets (EMs) have faced considerable macroeconomic concerns, culminating in a sixth consecutive week of outflows. In the latest week, redemptions reached $8 billion, following a substantial outflow of $24.4 billion the previous week.
The primary source of this pressure has been China-focused domestic funds, which have recorded approximately $79 billion in redemptions since April 2026. Global Emerging Market funds also experienced their third consecutive week of outflows, totaling $738 million, after a $2.6 billion outflow last week.
Elara Capital notes that this pressure is chiefly affecting long-only investment strategies, while exchange-traded funds (ETFs) have remained slightly positive. This dynamic suggests a decline in overall risk appetite, although passive allocations have yet to significantly reverse.
Since April 2025, foreign investment flows have shifted toward South Korea and Taiwan, largely to capitalize on AI trade opportunities, and Brazil due to the commodity upswing. This rotation appears to be at the expense of India and, to some extent, China. “We are now seeing the first sign of that leadership cycle slowing,” the report observed. South Korea experienced its first major reversal with a record outflow of $1.3 billion three weeks ago, followed by $587 million this week.
Taiwan has also begun to see a reduction in outflows, while Brazil recorded its largest redemption since December 2024, amounting to $230 million this week. Although it is still early in the evaluation, the momentum in flows that characterized the market since April 2025 is diminishing. While India’s flows remain weak, the speed of redemptions has eased in recent months.
In May, India’s outflows decreased to $702 million, down from $1.5 billion in April and a historic $3.5 billion in March. Notably, fund flows focused on India have stabilized over the past two weeks after experiencing 11 weeks of outflows totaling approximately $6 billion. Despite ongoing pressure on long-only funds, inflows into ETFs have countered some of the selling activity. Additionally, Japan reported a record outflow of $150 million in its investments in India.
The appetite for commodities also appears to be waning. Flows into precious metals turned negative for the first time in two years since April 2026, with cumulative outflows reaching $3.2 billion over the past four weeks. Commodity equity funds are witnessing a more pronounced reversal, experiencing an additional $1.5 billion outflow this week, alongside total redemptions of $8.6 billion since March 2026.
Elara Capital suggests that the cycle of commodity flows might be entering a consolidation or reversal phase, marking a broader shift away from the AI and commodity-focused trades that have driven EM performance over the past year.
