Non-resident investors added a net $21.7 billion to emerging market portfolios last month, a sharp decline from January’s record $100.5 billion and below the $45.5 billion recorded in February last year, the Institute of International Finance said.

The slowdown followed an unusually strong start to the year rather than a more fundamental shift in investor appetite, said Jonathan Fortun, senior economist at the IIF.

"The month-to-month slowdown is ... best read as a normalization after an outlier January print," he said in the IIF report.

Foreign investors allocated a net $14.3 billion to emerging market debt last month, while equity inflows slowed to $7.4 billion from $28.0 billion in January.

The February data predates a deterioration in global risk sentiment triggered by the U.S.-Israeli war on Iran whose spread in the Middle East has prompted a retreat from emerging markets and other risk assets in the first days of March.

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South Korea, which the IIF highlighted as an area of weakness in February flows, has since seen particularly steep equity losses even though the benchmark KOSPI remains strong on a year-to-date basis.

Debt inflows in February were spread across regions. Asia drew $5.9 billion, followed by Latin America with $4.3 billion, emerging Europe with $2.6 billion and the Middle East and North Africa with $1.5 billion.

China's debt market attracted $400 million in February after stronger inflows in January, while emerging markets outside China received $13.8 billion.

The IIF said that pattern suggests investors remain interested in higher-yielding markets outside China, even as conditions in global markets become less predictable.

Equity flows also stayed positive last month, although the regional picture was uneven.

China stocks sucked in $5.2 billion while emerging markets outside China added $2.2 billion. Across regions, Latin America led allocations with $6.9 billion, while emerging Europe and Middle East and North Africa also saw smaller inflows.

Asia equities overall recorded net outflows as selling in markets such as South Korea offset inflows elsewhere.

"In this environment, flows are likely to remain broadly resilient but increasingly differentiated, with balance sheet strength, policy credibility, and market depth playing a growing role in shaping investor allocation decisions," Fortun said.

Local currency bond markets continued to attract buyers as investors sought relatively high yields in countries where exchange rates and policy settings have remained broadly stable. A weaker dollar earlier in the year has also helped support returns across both local- and foreign-currency debt.

Even with steady inflows, February also showed that investors remain selective in how they allocate capital across emerging markets, the IIF said.

Late last month, Indonesia experienced a sharp bout of outflows from both equities and sovereign bonds after domestic market concerns. The IIF said the episode remained localized and did not spread across other emerging market assets.

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