Money exits emerging market funds as Iran conflict reverberates

By Libby George and Marc Jones

LONDON, March 13 (Reuters) – Flows of money into emerging market bond funds fell in the week to March 11, while those into emerging market equity funds flattened after five straight weeks of inflows, shaken by the war in Iran, analysts said on Friday.

Investors are fleeing assets perceived as riskier due to the uncertainty caused by the conflict and surging oil prices, even though some say the strong fundamentals of many emerging economies could help shield them from the fallout.

“EM credit had been remarkably resilient to the AI disruption-driven gyrations in broader risk markets in February,” Barclays head of EM credit research Andreas Kolbe wrote in a note.

“But recent events in the Middle East, and the associated spike in energy prices, have quickly shifted the narrative from a “goldilocks”-type environment to stagflation.”

He was referring to ideal conditions for emerging market assets due to the weaker U.S. dollar, years of post-COVID-19 policy reforms and solid central bank policymaking. Stagflation – low growth and high inflation – could derail that.

FIRST OUTFLOWS SINCE JANUARY

Morgan Stanley analysts said outflows from global-mandated emerging market debt funds reached $1.1 billion in the past week, based on data from EPFR, compared with inflows of $3.2 billion in the prior week.

The weekly outflows were the first such drawdown from emerging fixed income since early January.

Matt Vogel, head of emerging markets strategy with Marex, said the figures show roughly $21 billion had poured into hard and local currency emerging market debt in total during the first couple of months of the year – a record amount for the timeframe and almost two thirds of the $35 billion that flowed in during the whole of 2025.

Vogel said that while the record amount of EM sovereign and corporate debt issued so far this year had absorbed a large chunk of that, there is still cash available should the situation in the Middle East improve.

If it doesn’t, the risk of high inflation and stagnating growth is likely to keep emerging assets under the kind of pressure they are now seeing.

“A goldilocks scenario was a 40% probability at the start of the year,” Vogel said, “but with a stagflation scenario – which is not the base case yet – you are looking at mid-single digit negative returns for the asset class.”

ENERGY PRICE SQUEEZE

Emerging markets had been enjoying a more than year-long rally, with everything from stocks to bonds to currencies outperforming investor expectations.

Central banks across developing nations had been growing somewhat optimistic about global economic resilience and receding price pressures.

But with no clear endgame a couple of weeks into the war, and with Iran’s new leader vowing to keep the crucial Strait of Hormuz passage for global shipping shut, investors are wavering.

This has, for now, short-circuited a monetary easing push among emerging market central banks and cast doubt on whether the emerging market rally can resume.

“We maintain a cautious stance on emerging market assets due to significant headwinds,” Citi analyst Luis Costa wrote, adding: “it will all depend on the longevity of this energy price squeeze.”

(Reporting by Libby George. Additional reporting by Marc Jones and Karin Strohecker; Editing by Amanda Cooper and Sharon Singleton)