The strong investor rally around artificial intelligence and commodity-linked emerging market (EM) trades is beginning to slow, while India’s pace of foreign fund outflows has moderated in recent months, according to a report by Elara Capital.
EM funds recorded a sixth consecutive week of outflows, with investors pulling out nearly USD 8 billion this week after a sharp USD 24.4 billion redemption in the previous week, the report said.
China-focused domestic funds continued to account for the bulk of the pressure, witnessing nearly USD 79 billion in outflows since April 2026. Global EM funds also remained under stress, logging a third straight week of withdrawals at USD 738 million following USD 2.6 billion in outflows last week.
Elara Capital noted that the selling pressure remains concentrated in long-only strategies, while exchange traded funds (ETFs) have stayed mildly positive, suggesting passive allocations have not fully reversed yet.
AI Trade Momentum Slows
Since April 2025, foreign portfolio flows had shifted towards South Korea and Taiwan to capitalise on the AI-led rally, while Brazil attracted inflows due to the commodity upcycle, largely at the expense of India and partly China.
However, the report said the leadership cycle driving those trades is now showing early signs of slowing.
South Korea recorded a sharp USD 1.3 billion outflow three weeks ago, followed by another USD 587 million withdrawal this week. Taiwan has also started witnessing slower flows, while Brazil posted its biggest redemption since December 2024 at USD 230 million.
India, though still witnessing outflows, has seen the pace of selling moderate. Outflows from India-focused funds slowed to USD 702 million in May compared with USD 1.5 billion in April and a record USD 3.5 billion in March.
The report added that India-focused fund flows have stabilised over the past two weeks after 11 consecutive weeks of outflows totalling nearly USD 6 billion.
Long-only funds continue to remain under pressure, although ETF inflows are offsetting a large part of the selling. Japan-origin flows into India, however, saw a record USD 150 million outflow.
Commodity Theme Weakens
The report also pointed to fading momentum in commodity-linked trades. Precious metal funds turned negative in April 2026 for the first time in two years, with cumulative outflows of USD 3.2 billion over the last four weeks.
Commodity equity funds also continued to witness heavy redemptions, recording another USD 1.5 billion outflow this week and cumulative withdrawals of USD 8.6 billion since March 2026.
Elara Capital said the commodity flow cycle may now be entering a consolidation or reversal phase, indicating a broader slowdown in the AI- and commodity-driven trades that had led EM market performance over the past year.