For the first time since 2018, emerging markets are seeing larger capital inflows than developed markets - a trend that's been building throughout 2025 but really accelerated in the past quarter.
According to data released yesterday by the Institute of International Finance, emerging economies attracted $127 billion in portfolio investments during Q2 2025, compared to $98 billion flowing into developed markets during the same period.
I've been watching this shift develop, and it's fascinating to see how dramatically investor sentiment has changed since the post-pandemic years. Several factors seem to be driving this:
- Demographic advantages - Countries like India, Indonesia, and Vietnam have younger populations entering their prime earning years, creating consumer booms
- Technological leapfrogging - Many emerging economies have skipped legacy systems entirely (like landline phones) and built modern digital infrastructure from scratch
- Valuation gaps - After years of underperformance, many emerging market stocks trade at significant discounts to their developed market counterparts
Emily Carter from Investment Partners pointed out something interesting when I spoke with her last week: "We're seeing a fundamental reassessment of risk. Investors increasingly view certain emerging markets as potentially more stable than developed markets facing demographic decline and debt issues."
The countries attracting the most investment are a mix of the usual suspects and some surprises: - India continues to lead, with $42B in inflows - Indonesia has emerged as a strong second, attracting $28B - Brazil has rebounded strongly after policy shifts, pulling in $23B - Vietnam and the Philippines round out the top five
Not all emerging markets are benefiting equally though. Countries with political instability or questionable monetary policies (like Turkey and Argentina) continue to see capital outflows.
For retail investors, this trend suggests it might be worth reviewing your portfolio's geographic allocation. Many Americans remain underexposed to emerging markets - typically allocating less than 5% of their portfolios when financial advisors often recommend 15-20% for long-term investors.
