Are investors drawn to emerging countries because of their fundamentals or because of concern over OECD countries?

Since 2016, investor capital flows have headed to emerging countries, whose financial markets have picked up. We ask whether emerging countries’ newfound appeal stems from: A fundamental improvement in emerging economies; Or concern among investors over OECD countries, causing them to switch to emerging countries simply as a substitute to investing in OECD countries. We find that the first explanation is the more apt. While there may be substitution in capital flows between emerging countries and the euro zone, this is not the case with the United States.