Foreign investment in emerging market stocks and bonds outside China has come to an "abrupt standstill" due to fears that many economies will not recover from the pandemic this year, according to a report by the Institute of International Finance.
In its latest capital flows tracker, the organisation estimates that emerging market securities attracted around $16.8bn in December 2021, but IIF believes the outlook is worsened by the Omicron variant and expectations of a stronger dollar and higher US interest rates.
Jonathan Fortun, economist at the IIF, said: "On the other hand, we see flows into China sustaining the overall picture. The last quarter of the year has seen investors pumping money, particularly into China equities. This China and non-China EM split is rooted on the growth outlook.
We see non-China EM in a de facto sudden stop. Underlying this overall picture is a lot of differentiation across individual emerging markets."
"Markets see China rebounding more quickly than other EMs. Moreover, inflation is forcing the hand of policy makers across the EM landscape. Consequently, our tracker shows bond flows diminishing, as 15 of 20 major EM central banks have tightened monetary policy since May."
Non-China emerging market debt suffered an outflow of $9.6bn, while Chinese debt attracted $10.1bn in December, the data shows.
Meanwhile, investors flooded $16.3bn into equities, with China once again taking the lion's share ($12.5bn).
Fortun added: "We see non-China EM in a de facto sudden stop. Underlying this overall picture is a lot of differentiation across individual emerging markets.
"The latest Omicron variant, an acceleration of Fed tapering, and stronger dollar carry additional risks for an already stressed EM flows picture going forward."
Regionally, Fortun highlighted, there were some gains in Asia and Latin America, with inflows of around $8.6bn and $9.4bn, but outflows across the board elsewhere.