EM capital flows: Asia and the Middle East take centre stage

Quick recap

Over the past 20 years, EMs have undergone a profound transformation. While some economies still face volatility, many – especially in Asia – have made significant strides in development, entrepreneurship and market maturity. The dominance of state-controlled companies has started giving way to a broader, more dynamic corporate landscape, driven by local innovation and wealth creation. This evolution has sparked a major shift in capital flows. Domestic investors – from governments to individuals – are playing an increasingly central role in shaping EM.

The rise of local investor

From sovereign wealth funds to retail pension plans, local capital is on the rise. In China, retail investors dominate, accounting for around 90% of daily trading volumes. At the same time foreign ownership remains below 10%, making it one of the most domestically driven markets in the world [1]. In India, pension reforms have unlocked a wave of SIPS (systematic investment plans), with millions of individuals contributing monthly, adding around US$2.8 billion to the market each month [2].

For investors, this matters. Domestic capital tends to be stickier, less prone to sudden outflows and more aligned with long-term growth. It also supports market resilience and depth, especially in times of global volatility.

In the Middle East, sovereign wealth funds remain the primary drivers of domestic investment. While international allocations haven’t shifted dramatically, there’s a clear strategic pivot toward local economic development. Infrastructure is central to this transformation, with countries like Saudi Arabia and the UAE investing heavily to move beyond oil and grow their domestic industrial base.

Middle East – from capital source to investment destination

Once seen purely as a source of capital, the Middle East is now emerging as a compelling investment destination. Asset managers are deploying significantly more equity and fixed income capital into the region – in some cases, 15 times more than five years ago by our numbers. The inclusion of Saudi Arabia’s Tadawul in the MSCI EM Index in 2019 triggered a wave of passive and active inflows, while regulatory reforms have made markets more accessible and investable.

Saudi Arabia has hundreds of billions worth of infrastructure projects planned or underway, with the sector projected to grow from US$36 billion in 2024 to US$44.8 billion by 2029. Transport infrastructure is a standout, expected to reach US$154 billion by 2029, driven by mega-projects like NEOM and the Red Sea development [3].

The UAE is also scaling up, with US$23 billion in infrastructure investment focused on smart cities, renewable energy and transport [4]. Abu Dhabi’s Ghadan 21 programme alone channels US$13.6 billion into infrastructure, education and tech [5]. Sovereign wealth funds like ADIA, Mubadala and PIF are backing these efforts.

For investors, this shift opens up multiple avenues: 

Financial hubs like ADGM and DIFC are attracting global hedge funds and investment teams (including Aberdeen), not just for distribution but for core decision-making. The region’s transformation is visible – from abandoned buildings post-2008 to luxury villas and thriving business districts. With infrastructure investment and policy reform accelerating, the Middle East is fast becoming a key pillar of EM growth.

Asia’s evolution – liquidity, reform and retail power

Asia’s capital markets are evolving rapidly, driven by liquidity initiatives, regulatory reform and changing retail behaviour. In North Asia, countries like China and South Korea are reforming state-owned enterprises and encouraging transparency, dividends and share buybacks. Japan’s delisting and conglomerate break-up programme has inspired similar moves across the region.

Dividend reform is another key driver. In 2025, Chinese companies are expected to pay out a record 3 trillion yuan (US$419 billion) in dividends, up 10% from last year [6]. The dividend yield on Chinese stocks has climbed to 3% earlier this year, the highest in nearly a decade, with high-dividend stocks outperforming peers by 15% [7]. State-owned enterprises and tech firms like Alibaba and BYD are leading the charge, reflecting a broader shift toward shareholder returns. For yield-focused investors, this presents a growing pool of income-generating assets.

In South and Southeast Asia, liquidity remains a challenge. Governments are responding with targeted interventions. These include Singapore’s S$5 billion Equity Market Development Programme, and India’s efforts to reduce administrative barriers for foreign investors. Retail behaviour is also shifting, though slowly. In Singapore, for example, investors still treat equities like property – focusing on yield and monthly income – but education efforts are underway to promote total-return thinking.

Final thoughts…

Capital flows shape markets. As emerging economies evolve, so too does the source and direction of investment. Understanding these shifts is vital to capturing the next wave of growth. With decades of EM experience and deep on-the-ground expertise, we’re well-positioned to help investors turn these trends into opportunities.