The war situation in Iran has rapidly turned emerging markets into one of the worst places for global investors. Stocks and bonds that hit record highs just days ago are now under downward pressure. Traders are assessing how rising oil prices and a stronger US dollar—both shocks triggered by the conflict—may weaken the outlook for some of the world’s fastest-growing economies. Asia has borne the brunt of the sell-off, with South Korean stocks falling 18% this week alone.
This sudden shift has raised concerns about whether the investment value of emerging markets has fundamentally changed. Before the conflict, top fund managers were building long positions in Asia, Latin America, and parts of the EMEA region, betting on strong growth, slowing inflation, and global monetary easing. Now, the risk of persistently higher energy costs and a stronger US dollar has triggered a wave of investor selling.
Sonal Desai, Chief Investment Officer for Fixed Income at Franklin Templeton, said, "The resilience of emerging markets will now be tested. After a strong start to the year, we may see the most severe impact here."
On Wednesday, the sell-off in emerging-market equities intensified, with a key benchmark index falling as much as 4.4% and approaching a technical correction. In contrast, the MSCI global and developed-market equity indices fell less than 1% before U.S. markets opened.
A dollar-denominated emerging-market bond index posted its largest two-day decline since April. Since Monday, a currency index has fallen 1.7% and is on track for its worst weekly drop since March 2020.
Fund flows reflect deteriorating sentiment. Markets like South Korea, which is home to many chipmakers and a major beneficiary of this year’s stock rally, led the declines.
For many investors, the most pressing question now is how to adjust portfolios in response to rising energy prices. A key strategy gaining traction among trading desks is to distinguish between winners and losers based on oil exposure—selling large importers and buying exporters instead.
Marcelo Assalin, Head of Emerging Markets Debt at William Blair, said, "While we believe it is too early to directly increase risk exposure, we have started shifting investments away from oil-sensitive importers toward more geographically neutral oil exporters as energy prices rise." The firm is currently underweight Middle Eastern markets.
In Asia, importers such as South Korea, Thailand, and India are vulnerable to sustained oil price increases, while exporters like Malaysia may be more resilient. Higher crude prices could push up consumer prices, complicating the outlook for central banks that had only recently begun considering interest rate cuts.
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