Global Capital Accelerates Shift to Emerging Markets
On July 29, 2026, the International Institute of Finance (IIF) released its latest capital flows report showing that in the first three weeks of July, emerging markets attracted a cumulative net foreign inflow of $21.8 billion, the highest for the same period since 2024. Among them, China's bond market attracted $11.3 billion, India's stock market received $7.1 billion, together accounting for 84% of total inflows into emerging markets. This wave of capital migration marks a significant structural adjustment in global asset allocation.
Fed Policy Shift Becomes Key Driver
Market consensus holds that the core driver of this capital flow to emerging markets comes from Fed easing expectations. CME FedWatch Tool data shows the probability of a 25 basis point rate cut in September has reached 78%, with cumulative cuts expected to reach 75 basis points by year-end. The dollar index has fallen 4.2% from its June high, briefly breaking below 101, directly reducing currency risk for emerging market assets. Zhang Ming, global macro strategist at Standard Chartered Bank, noted: "When the dollar enters a depreciation channel, investors naturally seek higher-yielding assets; emerging market bonds and stocks offer a more attractive risk premium compared to developed markets."
China Bond Market: The Anchor of Foreign Allocation
China's bond market is the biggest beneficiary of this capital inflow. As of July 28, foreign institutions held 4.32 trillion yuan in Chinese bonds, up 9.7% from the beginning of the year. Rohit Singh, global emerging market bond index manager at JPMorgan, said: "Chinese government bonds generally offer higher yields than comparable maturities in the US and Germany, and have low correlation with global assets, providing unique diversification benefits." Notably, the People's Bank of China resumed 14-day reverse repo operations in mid-July and cut the reserve requirement ratio by 0.5 percentage points, further cementing market confidence in renminbi assets. Additionally, the accelerated internationalization of the renminbi—its share in global payments rose to 4.8% in May, surpassing the yen to become the fourth most active currency—also strengthened foreign investors' willingness to hold Chinese bonds.
India Stock Market: High-Growth Story Attracts Capital
India's stock market also performed strongly. The NIFTY 50 index has risen 14.3% year-to-date, with foreign net purchases reaching $24.7 billion, close to the full-year 2025 level. Drivers include: India's manufacturing PMI staying in expansion territory for 28 consecutive months, reaching 58.9 in June; the Modi government's new round of infrastructure stimulus plan worth 5 trillion rupees; and the resilience of India's vast domestic market amid internal and external pressures. Liu Jinjin, Goldman Sachs Asia equity strategist, noted: "India is in the midst of a demographic dividend boom; digital transformation and supply chain restructuring are creating structural investment opportunities."
Other Emerging Market Highlights
- Brazil Stock Market: Driven by a rebound in commodity prices, the IBOVESPA index hit an all-time high in July, with net foreign inflows of $1.8 billion.
- Mexico Bond Market: Benefiting from nearshoring trends and relatively high real interest rates, the 10-year government bond yield reached 7.2%, attracting substantial fixed-income funds.
- Indonesia Sovereign Bonds: Fitch upgraded Indonesia's sovereign credit rating to BBB+ in July, boosting inflows; foreign holdings of Indonesian government bonds rose to 38.1% since July.
Risk Factors and Allocation Suggestions
Despite strong capital inflows, emerging market assets face multiple challenges. Geopolitical risks (e.g., US-China tech competition, border frictions between India and neighboring countries) could trigger sentiment reversals; some countries have higher-than-expected inflation persistence (e.g., Turkey's CPI remains above 25%), forcing central banks to maintain tight policies; additionally, if the Fed's rate cut path falls short of expectations, it could lead to a dollar rebound and trigger capital backflows. Asset management firm BlackRock, in its latest global allocation report, suggests investors adopt a "core + satellite" strategy: use bonds from large economies like China and India as core holdings for stable returns and hedging; meanwhile, select stocks and bonds from high-growth markets such as Indonesia and Mexico as satellite positions to enhance return potential. Additionally, it recommends using ETFs for regional diversification to reduce country-specific risk.
Future Outlook
Looking ahead to the second half of the year, market expectations are that the attractiveness of emerging market assets will continue to rise. Evan Brown, global head of emerging markets at UBS, said: "Global capital is shifting from 'defense mode' to 'searching for growth'; the valuation advantage and growth differential of emerging markets will be long-term drivers." Meanwhile, the deepening of ESG investment principles has led to a notable increase in green bond and sustainability-related fund issuance in emerging markets, offering new allocation options for foreign investors. Mazhu Investment reminds that as global asset allocation rebalances, investors should closely monitor fundamental divergences and liquidity changes among countries, and flexibly adjust positions to capture long-term growth opportunities in emerging markets amid volatility.
(Data sources: International Institute of Finance, EPFR Global, central banks and exchanges of various countries, as of July 28, 2026)
