EM Portfolio Flows Rebound Sharply in December 2025: Debt Drives $36.7 Billion Inflow

Emerging market (EM) portfolio flows ended 2025 on a high note, with nonresident inflows surging to $36.7 billion in December, according to the latest Institute of International Finance (IIF) Capital Flows Tracker released in January 2026. This marked a dramatic $42.1 billion swing from November’s $5.4 billion outflow, signaling renewed investor confidence and a firmer footing heading into the new year.Debt proved the primary anchor for the recovery, attracting $29.4 billion in inflows during the month.

EM Portfolio Flows

This extended a year-long trend where EM debt absorbed a cumulative $315.3 billion on a year-to-date basis—broadly in line with 2024 levels despite shifting global rate expectations and bouts of volatility. The resilience underscores the enduring appeal of carry trades, bolstered by short-duration exposures and improving balance sheets in several key EM economies. Investors favored markets with strong policy credibility and predictable funding conditions, making flows increasingly selective rather than broad-based.Equity flows, meanwhile, stabilized with $7.3 billion in positive inflows, a welcome reversal from November’s sharp $20.6 billion retrenchment.

China – rebound

China drove much of this rebound, pulling in $5.2 billion, while EM ex-China saw a more modest $2.1 billion. However, equity remained negative for the full year at -$48.9 billion, confirming its role as the volatile “swing asset” in 2025—highly sensitive to global risk sentiment, tech positioning, and China-specific developments, without establishing a sustained upward momentum.Regional dynamics reinforced familiar patterns: EM Asia led with $17.1 billion in inflows, supported by both debt and equity, solidifying its position as the main conduit for foreign allocation. Latin America followed closely at $10.4 billion, largely debt-driven and reflecting sustained interest in high-carry environments with stable macro backdrops. EM Europe added $5.2 billion, while MENA contributed $4.0 billion, continuing to benefit from strong sovereign and quasi-sovereign demand.A stark divergence persisted between China and the rest of the EM universe. China recorded net debt outflows of $5.5 billion in December, while EM ex-China absorbed $34.9 billion—mirroring 2025’s broader allocation shift toward higher-carry markets with clearer policy anchors, and caution around China beyond tactical plays.

Improved global risk appetite

The December strength occurred amid modestly improved global risk appetite late in the month, though investors stayed wary of rate volatility and policy uncertainty. Record EM sovereign issuance was absorbed smoothly, highlighting intact demand for quality debt even in a high-supply environment. The binding constraint has shifted toward access, differentiation, and market-specific factors.Looking to early 2026, debt enters the year with structural tailwinds from carry, short durations, and improving fiscal/reserve dynamics in major EMs. Yet, carry’s protective power against FX or rates shocks is limited, suggesting flows will grow more sensitive to policy credibility, funding stability, and issuance trends—further emphasizing differentiation.Equity, by contrast, remains fragile, capable of tactical recoveries but prone to sharp adjustments amid volatility or unclear global signals. The persistent China vs. ex-China split will continue shaping outcomes, with durable inflows hinging on a move beyond episodic trading.

Overall, December’s data indicate 2026 will not deliver uniform EM gains. Instead, portfolio flows are poised to reward balance sheet strength, credible policies, and markets where carry is reinforced by solid macro and financial conditions—setting the stage for a selective, quality-driven year ahead.

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