War in Middle East triggers capital reversal in emerging markets

Emerging markets are experiencing a reversal of capital flows from nonresident nonbank investors. This shift follows the intensification of the US war against Iran and the naval blockade of the Strait of Hormuz. The IMF notes that since 2008, portfolio inflows to emerging markets have increased eightfold to $4 trillion, with 80 percent of that capital supplied by investment funds, hedge funds, pension funds, and insurance firms. This nonbank finance is increasingly sensitive to global risk conditions. The conflict has caused infrastructure damage, supply disruptions, and losses of confidence, which have shifted those conditions. These risks have now come to the fore as emerging markets face increased financial instability.