The emerging markets are seeing a cautious recovery in foreign capital inflows as investor worries regarding protectionism in trade and higher tariffs start to recede after the re-election of U.S. President Donald Trump in November 2024.

Following an early spike in fund exodus from EMs to U.S. assets in the immediate aftermath of an election, newer data as put together by Elara Capital has shown signs that the tide is turning. Important EMs like India, Brazil, Hong Kong, and Taiwan have all reported strong foreign inflows in recent three weeks despite South Korea still being a singular exception with subdued inflow movement.

One of the strongest rebounds has been achieved by India. Of the $7.7 billion that retreated from Indian markets following the American election, at least $960 million, which is roughly 12%, is back in less than three weeks, as shown by Elara Capital's report.

Taiwan too has felt a similar return, with the 10% of its pre-outflows levels.

This renewed demand for EM assets appears to be driven not by a flight from U.S. funds but by a rise in global liquidity flowing into the market. While EM investments have risen, strong foreign inflows still are drawn into U.S. funds, an average of $6 billion a week. Domestic U.S. funds, however, have seen constant redemption pressures for six weeks in a row, which suggests a change of heart among American investors.

"India saw its biggest weekly inflow since July 2024, at $724 million, led by $487 million into India-dedicated funds the biggest in seven months. All the inflows were in large-cap funds. India-dedicated funds have seen $1 billion in inflows over the last six weeks, with $575 million into ETFs and $440 million into long-only large-cap funds. Luxembourg-domiciled funds contributed 40% of these flows, followed by 35% from Ireland and 20% from the U.S. Japan-focused funds, on the other hand, have witnessed steady outflows since November 2024," the report added.

In addition, investor behavior in other asset groups internationally indicates the possible alleviation of the general risk-off mood that dominated markets at the end of 2024. Junk bonds experienced inflows of $3.6 billion this week following five weeks of steep redemptions worth $31 billion. On the other hand, gold funds usually a safe haven in a period of volatility experienced outflows of $2.6 billion, breaking a 15-week string of combined inflows worth $34 billion.

Overseas flows to U.S. funds continue to be robust at $6 billion per week on average, showing that the recent EMs rally is not being done at the cost of U.S. assets. Domestic U.S. funds, however, have been subject to persistent redemption pressure for six weeks now, which could represent a divergence of sentiment between foreign and local investors.