Emerging-market stocks fell again on Tuesday, with MSCI's benchmark index dropping 2.7% to its lowest level in seven months. The slide came as a pullback in US technology shares cooled enthusiasm for the artificial-intelligence trade, which had been a key driver of gains in many developing markets.
India stood out as a rare bright spot, holding up better than most of its peers thanks to steady foreign inflows and cheaper oil. That divergence highlights how different factors can drive individual markets even when the broader asset class is under pressure.
Why emerging markets are sensitive to US tech moves
Emerging-market stocks are often treated by global investors as "risk-on" assets, meaning they are among the first to be sold when sentiment turns cautious. A tech-led decline in the US can therefore quickly spill over into developing markets, even if the underlying fundamentals there haven't changed.
The pressure wasn't limited to equities. Bank of America Global Research reported a $6.1 billion withdrawal from emerging-market debt funds in the week to November 4th, the first outflow in 14 weeks. Reuters noted that this was the sixth-largest weekly redemption on record.
When bond funds face large redemptions, they typically sell their most liquid holdings—often government bonds and local-currency debt—to raise cash. That selling can push bond yields higher. Higher yields, in turn, can strengthen the dollar as investors seek higher returns, making it more expensive to hedge currency exposure and tightening financial conditions in countries that rely on external funding.
This dynamic helps explain why higher-beta parts of the asset class, including some Central and Eastern European markets, saw their currencies weaken against the euro. MSCI's emerging-market currency index also posted a second consecutive weekly decline.
India's resilience: a different story
India's relative strength shows that not all emerging markets move in lockstep. The country has been a major beneficiary of foreign portfolio inflows, and its economy is less dependent on the AI-driven tech cycle than some of its Asian peers. Cheaper oil also helps India, which imports most of its crude, by reducing its import bill and easing inflationary pressures.
As a result, India can behave differently even when the broader emerging-market category is under strain. That's a useful reminder for investors that a single index can mask wide variations in performance across countries.
What it means for investors
For everyday investors, the key takeaway is that big outflows from emerging-market bond funds can turn routine selling into forced selling. When funds need to raise cash quickly, they often sell their most liquid assets, which can amplify market moves and create a feedback loop: yields rise, currencies weaken, and financial conditions tighten, which can then weigh on equities as well.
This is especially true for higher-beta countries and rate-sensitive local markets, where tighter financial conditions can spill over from bonds and foreign exchange into stocks. It's why the same headline tech wobble can lead to very different outcomes across regions, with places like Central and Eastern Europe often feeling the funding squeeze faster than markets backed by steady foreign inflows.
For those with exposure to emerging markets, it's worth remembering that volatility is part of the asset class. Diversification across countries and asset types can help cushion the impact of regional shocks. And while the AI trade has been a powerful driver of gains in recent years, it can also reverse quickly, as recent losses at some hedge funds show.
The broader backdrop remains uncertain, with investors watching US tech earnings, central bank policy, and the path of the dollar. As AI stocks have already shown, sentiment can shift fast, and emerging markets are often the first to feel the ripple effects.
