AI, commodity trades show early exhaustion; India outflows moderate as global rotation slows: Elara Capital

NEW DELH: The AI and commodity-led trades that drove emerging market flows since April 2025 are showing early signs of exhaustion, while India’s pace of outflows has moderated as the global rotation slows, according to a research report by Elara Capital.

Macro concerns continue to weigh on EMs, with a sixth consecutive week of outflows. Another USD 8 billion was redeemed this week, following a large outflow of USD 24.4 billion last week. The bulk of the pressure continues to originate from China-dedicated domestic funds, which have seen redemptions of around USD 79 billion since April 2026.

Global Emerging Market funds also recorded their third week of outflows at USD 738 million, after a USD 2.6 billion outflow last week. Elara notes that the pressure is largely concentrated in long-only strategies, while ETFs remain mildly positive. This suggests that broad risk appetite is weakening but passive allocations have not reversed yet.

Since April 2025, foreign flows had rotated toward South Korea and Taiwan to play the AI trade, and Brazil on the back of the commodity rally, largely at the expense of India and partially China. “We are now seeing the first sign of that leadership cycle slowing,” the report said.

South Korea was the first to reverse, witnessing a record USD 1.3 billion outflow three weeks ago followed by USD 587 million this week. Taiwan has also started seeing slower outflows, while Brazil recorded its largest redemption since December 2024 at USD 230 million this week. Although still early, the flow momentum that dominated since April 2025 is beginning to lose strength.

India flows remain weak, but the pace of redemptions has moderated over the past few months. India outflows slowed to USD 702 million in May from USD 1.5 billion in April and a historic USD 3.5 billion in March. Importantly, India-focused fund flows have stabilised over the last two weeks after 11 weeks of outflows totaling around USD 6 billion. While long-only funds continue to witness pressure, ETF inflows are offsetting a large part of the selling. Japan flows into India saw a record outflow of USD 150 million.

The commodity theme is also losing steam. Precious metal flows have turned negative since April 2026 for the first time in two years, with cumulative outflows of USD 3.2 billion over the past four weeks. Commodity equity funds are witnessing a sharper reversal in momentum, recording another USD 1.5 billion outflow this week and cumulative redemptions of USD 8.6 billion since March 2026.

Indications are that the commodity flow cycle may now be entering a consolidation or reversal phase, Elara Capital said, pointing to a broader shift away from the AI and commodity trades that led EM performance over the last year. (ANI)