Emerging Markets Experience Record Capital Influx in January 2026 as Carry Trade Dominates

The Institute of International Finance (IIF) has reported a monumental surge in portfolio investment toward emerging markets, with net inflows reaching a staggering $98.8 billion in January 2026. This figure represents a twenty-one-year peak for the month of January, easily eclipsing the previous record of $74.4 billion set in January 2018. The momentum marks a sharp escalation from the $32.6 billion recorded just a month earlier in December 2025.

Unlike previous cycles where emerging economies were often treated as a monolithic block, the early 2026 capital surge was notably selective in nature. Investors focused heavily on specific growth corridors, particularly Mexico, which benefited significantly from the ongoing reshoring trend. Certain Asian markets also attracted substantial interest, highlighting a more nuanced and strategic approach by global asset managers compared to previous years.

Jonathan Fortun, a senior economist at the IIF, identified the carry trade as the primary engine behind these massive capital movements. This strategy capitalized on wide interest rate differentials, most notably the gap between the Japanese yen and the Mexican peso. Victoria Rodríguez Ceja, the Governor of the Bank of Mexico (Banxico), confirmed that low levels of implied volatility made these carry trade positions particularly attractive, providing a significant boost to the peso through favorable rate spreads against developed economies.

Despite the current enthusiasm, the IIF has issued a cautionary note regarding the long-term viability of these flows. Analysts warn that the momentum generated by carry trade activities may not be sustainable as global monetary policies continue to normalize. While the outlook remains constructive—provided the US dollar remains stable and global growth risks do not spike—the market is expected to see increased differentiation between individual nations and financial instruments.

Structural hurdles remain a major concern, especially within Latin America. IIF analysts have flagged debt servicing as a primary challenge for 2026, citing high financing costs and relatively modest economic growth across the region. In Mexico, while foreign capital continues to arrive, Governor Rodríguez Ceja and Banxico have indicated that conditions may allow for further reductions in the target interest rate, all while maintaining a firm commitment to their 3.0% inflation target.

The International Monetary Fund (IMF) has projected that growth across Latin America will likely slow to 2.2% throughout 2026. This cautious outlook is mirrored in other financial segments; for the week ending January 7, 2026, net inflows into equity funds totaled a mere $2.2 billion. Conversely, investors poured a record $148.5 billion into money market funds, seeking safety in less risky assets amid heightened geopolitical tensions.

This flight to safety was fueled by significant global events, including the capture of Venezuelan President Nicolas Maduro and provocative rhetoric from US leader Donald Trump regarding Greenland. Simultaneously, the United States is navigating a complex fiscal landscape, needing to refinance approximately $9.2–9.3 trillion of its national debt within a 12-month window. This represents nearly one-third of its total market debt, with demand increasingly shifting toward domestic institutional buyers.

While Mexico led the charge, other South American nations like Chile, Peru, and Argentina also posted strong performance in early 2026. Their respective equity markets and national currencies rose, supported by climbing commodity prices and, in Argentina’s case, significant political reforms. In stark contrast, Russia’s energy-related budget revenues plummeted by half in January 2026 to 393.3 billion rubles—the lowest level since the summer of 2020—partly due to shifts in India’s trade policies. Ultimately, January 2026 highlighted a high concentration of investment interest driven by monetary factors against a backdrop of persistent macroeconomic fragility.