Investors Return to Emerging Markets After Iran Escalation

The Institute of International Finance tracked a sharp return of global capital to emerging-market assets in April 2026 after an escalation of the Iran conflict around Feb. 28, reversing outflows recorded in late February and March.

The initial sell-off erased gains that many top-performing emerging-market funds had built in January and early February. Several funds that averaged 30%–40% returns in 2025 posted losses of about 6% to 8.6% after the escalation.

IIF flow data and market price action showed the largest outflows in late February and March, followed by inflows in April as investors redeployed capital into emerging-market equities and debt.

Portfolio managers identified specific pockets of opportunity. Eric Fine of VanEck described emerging-market debt as having ‘structural momentum remains strong’ and pointed to value in the sector.

Performance was uneven across regions and products. China-focused offerings held up relatively well; ETFs such as the Amundi MSCI China ESG Selection Extra and the Invesco ChiNext 50 UCITS ETF outperformed many peers in the weeks after the escalation.

Funds that maintained exposure through the February–March drawdown remained positioned to benefit from the price recovery, according to IIF data. Managers who sold during the initial panic realized losses and faced the choice of buying back at higher levels or staying out of the market.

By May 2026, 62% of the leading funds from 2025 had fallen into the bottom quartile after the shock, the IIF found. The data record the depth of the early losses and the partial reversal that took place in April.

The sequence recorded by the IIF is clear: an escalation on Feb. 28 triggered a rapid re-pricing of risk across emerging markets, producing acute outflows in late February and March, and then a rebound in April as global investors returned to emerging-market assets.