Foreign investors withdrew $26.3 billion from emerging-market stocks and bonds in September, marking the first monthly outflow since June, as a hawkish Federal Reserve pushed US yields and the dollar higher, the Institute of International Finance said on Wednesday, Reuters reported.

Non-resident investors pulled $7 billion from emerging-market fixed-income assets during the month, resulting in the first net outflow since March, when an escalating conflict in the Middle East unsettled global markets.

Emerging markets came under pressure after the Fed, led by Kevin Warsh, raised interest rates for the first time since 2023 and signalled that inflation remained a concern.

The Federal Open Market Committee's decision sent US Treasury yields sharply higher, strengthened the dollar and prompted investors to retreat from riskier assets.

“The pressure built in the second half of the month, as hard currency bond funds turned to outflows in the week of the FOMC decision and EM dollar credit spreads widened,” the report said, according to Reuters.

“Looking ahead, a hawkish Warsh Fed that projects further hikes, a BoJ (Bank of Japan) at its highest policy rate since 1995 and broad tightening across advanced economies all raise the hurdle for EM carry into the fourth quarter,” it added.

Heavy foreign selling in South Korea drove a $19.2 billion outflow from emerging-market equities in September, according to the IIF.

“Foreign selling of Korean equities has run through most of the year, and its September peak came after a 62% rise in the KOSPI this year,” the institute said.

The retreat also coincided with cooling enthusiasm around the artificial-intelligence-driven technology rally that had lifted several Asian markets this year. Investors locked in gains from richly valued semiconductor and technology stocks.

All regions recorded fixed-income outflows in September, although the asset class has still attracted $246 billion from foreign portfolio investors so far this year.

The picture was weaker for equities, where year-to-date outflows reached $113.9 billion, compared with $27.3 billion during the same period last year. Excluding China, equity outflows totalled $151.5 billion.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)