Global investors are increasingly redirecting capital towards emerging markets closely tied to the artificial intelligence (AI) investment cycle, with South Korea and Taiwan emerging as key beneficiaries. This shift, observed in August 2026, has seen these East Asian economies attract significant foreign inflows, while India-focused funds continue to experience redemptions.
AI's Influence on Emerging Market Capital Flows
According to the latest Global Liquidity Tracker by Elara Securities, South Korea led emerging-market inflows, securing an additional $3.5 billion in foreign capital. Taiwan also saw robust investor interest, recording a 23-week high inflow of $1.8 billion. This strong performance highlights how the global AI trade is profoundly influencing capital allocation across emerging markets, with investors prioritizing regions perceived to benefit from the expanding AI ecosystem.
Beyond East Asia, Brazil and Mexico also noted improved foreign participation as their markets stabilized. At a broader level, General Emerging Market (GEM) funds registered a six-month high inflow of $4 billion, coinciding with a rebound in the EM Index. Global industrial funds also saw accelerated inflows, reaching a seven-week high of $1.3 billion, further reflecting sustained capital allocation towards the AI sector.
India's Outflow Challenge and Moderating Pressure
In contrast to its East Asian counterparts, India has remained under pressure from foreign outflows. India-focused long-only funds continued to witness redemptions throughout 2026, primarily due to capital being redirected towards the burgeoning AI trade in markets like Taiwan and South Korea, as noted by Elara. However, there are early signs that this pressure is moderating.
Since mid-June 2026, India-focused long-only funds have demonstrated a relative outperformance of approximately 10% compared to broader emerging-market long-only funds. This marks their strongest phase of relative outperformance since early 2025, suggesting a potential shift in investor sentiment. While foreign investors have not fully reversed their selling, the performance gap is beginning to move in India's favor.
Is the AI Trade Becoming Overcrowded?
A crucial question for the sustainability of current capital rotations is whether the AI trade has become overcrowded. Elara Securities points out that a significant portion of the AI trade has indeed become crowded over the past three months, a period during which returns have started to moderate. Although recent market corrections have not yet triggered widespread redemptions, the true test will be if investors who entered during the recent phase of enthusiasm maintain their positions should returns remain subdued.
For India, a potential slowdown in the AI-driven rotation could alleviate foreign-flow pressure. The report suggests that early signs of a deceleration in the rotation towards the AI trade are already visible, coinciding with the observed improvement in India's relative market performance. The emerging-market flow landscape remains dynamic, with South Korea and Taiwan continuing to attract substantial foreign capital while India's outflows show signs of moderation. The extent to which this translates into a broader reallocation towards India will depend on the continued evolution of the AI trade and investor preferences for its current beneficiaries.