Emerging markets: winning or losing from the crisis?

By Darius McDermott on 7 April 2026 in Asia/Emerging Markets

Until the recent crisis in the Middle East, emerging markets had been having a renaissance. With strong performance in 2025, investors had started to reappraise the sector, with its relative risks looking different through the lens of its role in the AI supply chain and China’s revival, plus more erratic US policymaking. Today, the question is whether the Iranian conflict disrupts that view.

Until recently, there were clear signs that investors were starting to treat emerging markets differently. Not only did the MSCI Emerging Markets index outpace the MSCI World by over 10% in 2025*, but there were also signs that the risk premium for emerging markets was narrowing. Analysts at MSCI said:

For most of the past decade, emerging markets showed greater volatility than developed markets. That might be expected from less developed economies with shallower capital markets which are more susceptible to foreign inflows and outflows. But since 2023, that has changed. Emerging and developed market volatility has been largely in line. Initially, this was because of a steep increase in developed market volatility, but today, emerging market volatility is as low as it has ever been. It is another sign that some of the historic assumptions about emerging and developed markets may be shifting.

However, the war in Iran could disrupt this relatively benign picture. Charles de Quinsonas, manager of the M&G Emerging Market Bond fund, said:

“Inflationary expectations matter particularly for local currency exposure, where oil importing countries (such as India and Turkey) face higher headline inflation and less room for central banks to ease, while even exporters can see their currencies weaken initially as geopolitics, rather than balance of payments logic, dominates market behaviour.”

This has already been seen across both stock and bond markets in emerging markets. India, for example, is the worst-performing sector for the year to date**, with investors betting that the oil price shock will indebt India’s economy. However, all of Asia’s stock markets have been hit to some extent and even oil exporters such as Brazil have felt some pain.

Then there is the problem of the dollar. The weaker dollar has certainly helped sentiment towards emerging markets over the past year. It has allowed many emerging markets to loosen monetary policy. However, the dollar has seen a sharp rise since the start of the conflict. The DXY index, which measures dollar strength against a basket of international currencies, is up 2.4% over the past month***. Rising oil prices have often coincided with a strengthening of the US dollar. If this dynamic persists, it may act as a drag on growth for emerging markets and suppress earnings.

Long-term beneficiaries?

However, there is an argument that emerging markets may be a longer-term winner from the turmoil. At the margins, China appears to be having some success in presenting itself as the ‘rational’ player against an increasingly erratic US. At a recent gathering in Beijing, Chinese Premier Li Qiang said the country was a “harbour of stability” and a “cornerstone of certainty” in the face of unpredictable policymaking from the US. The audience comprised CEOs from around the world including Apple’s Tim Cook, Siemens’ Roland Busch, Volkswagen’s Oliver Blume, SK Hynix’s Kwak Noh-jung and Nestlé’s Philipp Navratil.

They have matched this rhetoric with action. Ian Hargreaves, manager of the Invesco Emerging Markets fund, says:

There have been similar regulatory initiatives in Korea, with its ‘Corporate Value Up’ initiative.

Equally, it is likely to accelerate the desire for spending on defence and clean energy infrastructure to increase resilience. The US, Japan, the EU and China were already entering a large-scale investment cycle driven by defence, energy security, supply chain resilience and long-overdue infrastructure upgrades. Alex Smith, part of the team on the Aberdeen Emerging Market Income fund, says:

He also points out that the AI CapEx impetus is still strong. Bloomberg expects Meta, Google, Amazon and Microsoft to spend around $600 billion on AI investment in 2026^. As a result, the earnings outlook for hardware manufacturers – many of which are listed in emerging markets – remains strong. Korean memory-chip suppliers are using their market leadership to push through price rises. Consensus expects 49% earnings growth for the broader technology hardware sub-sector^.

None of this is likely to be felt in the short term. Charles says that emerging market currencies and corporate bonds are likely to be hit by a general ‘risk off’ sentiment in markets in this early phase of the conflict. However, he adds, “If oil prices stay elevated rather than spiking briefly, fundamentals should start to matter more, supporting local rates and spreads in exporting countries, particularly across CEEMA (Central and Eastern Europe, Middle East, and Africa) and parts of Latin America where fiscal and external dynamics improve with higher energy prices.”

In the short term investors need to prepare for volatility across emerging market assets. However, in the longer term, there is a chance that this crisis goes one step further in recalibrating emerging and developed market risks.

*Source: index factsheet, 27 February 2026
**Source: FE Analytics, discrete annual calendar performance to 27 March 2026
***Source: US dollar index, as at 27 March 2026
^Source: Aberdeen, 6 February 2026