Key Takeaways
- The Iran war has stirred geopolitical nerves; EM markets have so far reacted in line with broader risk sentiment rather than fundamentals.
- Today’s EM backdrop is structurally stronger than in past cycles, supported by commodities, capex and supply‑chain realignment.
- Key risks to watch are oil and global liquidity, but barring a major shock, EM assets should be able to absorb this event
The US‑Israeli strike on Iran, and the killing of Supreme Leader Khamenei, has understandably heightened concern about Middle Eastern escalation. But our assessment is that market moves are consistent with recent risk sentiment rather than a shift in fundamentals. Also, the context in which emerging market (EM) assets trade today is not the same as the old “Monopoly‑era” cycle of hyper‑globalisation and disinflation.
Market impact: Noise, not fundamentals
The MSCI Emerging Markets (EM) Index is down around 10% since the start of strikes on Iran, which puts it back at mid-January levels. Korea has seen some volatility, reflecting strong prior performance and sensitivity to global risk sentiment and energy prices. But these moves appear to be driven more by positioning and momentum unwinds than fundamentals, limiting our immediate concern. For context, the Korean market is still up 20% year-to-date1. What matters for EM is not the headline shock itself, but whether it spills into the real economy through energy‑market disruption or a tightening of global liquidity. Neither is occurring so far.
Portfolio impact: Balanced, by design
Our direct exposure is limited given our longstanding underweight to the Middle East.
Even with our underweight stance to energy, oil is the primary indicator we will be monitoring. Higher crude prices would pressure major EM importers – China, India and Korea – via energy costs and margins. But this vulnerability is offset by strength in EM energy exporters and resource economies such as Brazil, Mexico and South Africa, which benefit from firmer commodity prices and improved fiscal dynamics.
In practice, these offsetting forces mean our portfolio beta to oil‑driven shocks is materially lower than during previous Middle East flare‑ups.
Why this shock feels different: We are in an “Age of Empires” world, not a “Monopoly” world
We sum up the global shift with an analogy using board games, whereby we are leaving the Monopoly era of effortless money creation and entering an Age of Empires world where resources, production and strategy determine who wins.
In the old era, markets rewarded financial assets, US duration and globalised supply chains. Shocks like this typically tightened dollar liquidity and hurt EM.
In the new era – one defined by supply‑chain diversification, commodity scarcity, geopolitics over efficiency, and capex replacing buybacks – EM sits on the right side of several structural trends:
- Real assets matter again. Many EMs control the commodities, industrial capacity and energy inputs that are now being repriced globally.
- Capex is replacing financial engineering. Global investment is flowing into manufacturing, power grids, semiconductors and defence – all supply chains in which EM plays a central role.
- The AI build‑out is an EM earnings story. Where US tech once directed cash into buybacks, it is now directing capex into EM manufacturing hubs.
- Relative valuations are attractive. EM trades at around a 30% discount to DM and around a 40% discount to US equities; historically such levels preceded periods of sustained EM outperformance.
This shift does not eliminate geopolitical risk. But it does change who structurally benefits when the world moves away from efficiency-at-all-costs and towards resilience, resources and production.
We see no evidence that this episode has damaged the earning power or balance sheet strength of the EM corporate universe. EM earnings revisions are positive, and many of our high‑conviction positions in technology, industrials and resource producers continue to benefit from strong order books and pricing power.
Portfolio stance: Disciplined, not passive
The mantra we advocate in relation to stock analysis is “don’t be a hero, don’t be a victim.” In practice, it means that periods of volatility are opportunities to upgrade quality. We distinguish between stocks that are weak for fundamental reasons and those caught in indiscriminate de-risking, and we use this as an opportunity to rotate out of lower- conviction names and add selectively where the market is mispricing resilience or structural leverage to the new regime.
The bottom line
This is a serious geopolitical event, but the underlying EM investment case remains strong. Unless we see evidence of sustained disruption to oil supply or a tightening in global dollar liquidity, history suggests EM can digest shocks like this quickly.
The world is shifting from Monopoly to Age of Empires – from financial assets to real assets, from efficiency to resilience. In that world, EM’s role becomes more, not less, central. Our positioning reflects that conviction, while remaining disciplined in the face of near‑term uncertainty.
