Capital Flows in a World in Transition
For decades, global capital had a clear path, moving toward East and Southeast Asia in search of higher returns, faster growth, and lower costs. These flows helped build factories, cities, and entire economies. But in 2025, that pattern may be starting to change. Rising trade tensions, new tariffs, and shifting investor sentiment are beginning to challenge this old story. This report looks at how capital is now starting to move, where it’s going, and whether a new chapter might be opening for South Asia and other emerging regions.
The full note sent to clients includes a more detailed exploration of these questions. A few limited extracts of these are given below -
Historically capital has moved to East and Southeast Asia which drove growth in the region.
For decades, money flowed steadily toward East and Southeast Asia, turning the region into a key player in the global economy. The trend began in the late 1970s and early 1980s, continuing through the 2010s. Funds came from the United States, Europe, and Japan, heading to countries like China, Vietnam, Thailand, and Malaysia.
The money that came in then began to transform these economies. China became the world’s top producer, with its ability to produce on a large scale rapidly growing. It built factories for everything from phones to cars, creating jobs and expanding cities. South Korea, Thailand, and Malaysia focused on exports, shipping electronics, food, and palm oil to global markets. Vietnam’s growth stood out after a 2009 crisis, using funds to build industries like textiles.
However, Trump’s relection and global tariffs could now change the story for these economies.
Following Donald Trump’s re-election in November 2024, investors grew increasingly cautious about the future of global trade. Even before any formal policy changes, the threat of tariffs and protectionist rhetoric prompted market reactions. Investors began reallocating capital, anticipating potential disruptions to supply chains and trade relationships that had supported the growth of East and Southeast Asian economies for decades. In the weeks and months after the election, several regional stock markets experienced declines, reflecting this uncertainty. The possibility of rising trade barriers created a sense of risk, especially for economies heavily dependent on exports to the United States.
Further, countries in East and Southeast Asia will likely experience these changes unevenly. Those with deeper reliance on U.S. trade like Vietnam and China may feel the impact more acutely, while others with more diversified export bases could weather the transition better. Nevertheless, the broader message is clear, the global environment that once fueled massive capital flows into the region is now starting to shift.
Could this money eventually end up in South Asia?
The money currently sitting in safer assets is unlikely to stay there permanently. When risk appetite returns, investors will begin looking for regions that offer growth potential with relatively lower exposure to global trade tensions. This is where South Asia might start to stand out.
Compared to East and Southeast Asia, South Asian economies might end up facing fewer risks from tariffs. One of the main reasons is their lower reliance on exports. According to World Bank data from 2023, Vietnam’s exports make up around ~90% of its GDP, and the exports to US is around 30-40% of GDP. Similarly in Thailand and Malaysia, the exports to US as percentage of GDP is closer to 12%.
South Asia, in contrast, has lower export exposure. Countries like India and Sri Lanka record trade related exports in the 10–20% of GDP range, while Bangladesh is even lower. India's exports to the U.S. are only 3.5% of GDP, according to the World Bank. Bangladesh, been growing its manufacturing base in textiles, an industry that could benefit from rising costs or trade complications in Southeast Asia, though recent complications despite internal challenges. So, South Asia’s lower trade dependence, combined with expanding domestic industries, might ironically end up making it a realistic alternative for investors looking to diversify.
In addition to the fact that South Asia as a region might less exposed to this tariff risk, it is also a region that has been growing. It has been the fastest-growing region, with India driving its growth. With a large domestic market, India offers a place to sell goods without depending heavily on exports, potentially attracting funds to build new industries.
While some money moves into the South Asian region, can some of it move to Sri Lanka?
Sri Lanka has surpassed growth targets, growing by 5% in 2024, it has made some progress in its external debt restructuring, continued its fiscal reforms, and stuck to the IMF pathway despite a change in the government. The IMF has also commended Sri Lanka, calling its recovery “remarkable.” In a situation like this, while there is still so much more that has to be done to attract some form of investment, maybe in terms of portfolio or even FDIs, the probability of some money coming in is still higher than ever before.
Where else could the capital go, if not for South Asia?
It’s not just South Asia that could stand to benefit. Some of the capital could flow into smaller, less exposed economies that offer a stable environment. For example, Mexico has been less affected by the recent tariffs and is geographically close to the U.S. With lower labour costs and strong trade ties, it could be a practical choice for investors and manufacturers alike.
Overall, while it's still too early to say exactly how much capital will move, or where exactly it will land, one thing is clear, the flow of global changing is changing, and it does not have to necessarily move in the way it did in the past. And in this new environment, regions like South Asia, less exposed and still growing, might just find themselves with an opportunity to shape a new investment story.
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(Frontier Research is a Colombo-based firm that engages in macroeconomic research and advisory for corporate and investment clients on Sri Lanka, South Asia, and South East Asia.)