How the Middle East conflict is reshaping emerging markets

The economic impact of the conflict has fallen unevenly across the asset class — and not where most investors would have predicted.

The economic consequences of the Iran conflict that began in late February are still unfolding. For emerging markets, the consequences have been significant but the emerging picture is substantially more complex than the standard oil-shock you would expect, according to Carmignac.

Despite the disruption that followed the Strait of Hormuz closure, emerging markets continue to outperform developed markets in 2026¹. That resilience hinges on the fact that the economic pressure has not landed where most investors expected.

Naomi Waistell, co-fund manager of Carmignac Portfolio Emergents, explained: "If I can use the image of a car, there are two forces at play in emerging markets right now. You have the AI theme, which acts like an accelerator, pushing markets higher. And then you have the Middle East conflict, which acts like a brake, trying to bring them down."

January and February were exceptional months for emerging markets, as AI momentum drove Korean and Taiwanese markets sharply higher. The onset of the conflict changed the picture in March but across the asset class, the economic impact has not followed the conventional oil-shock script.

The most counterintuitive aspect of the conflict's economic impact concerns the Gulf states themselves.

The Strait of Hormuz carries roughly 20% of global oil and LNG supply². It also carries the export routes of the countries that produce that oil. When Iran closed the strait in early March, Saudi Arabia, Kuwait, the UAE and Iraq lost their primary means of getting product to market. Collective Gulf output fell by at least 10 million barrels per day. Elevated oil prices offer little advantage when the infrastructure needed to export them is inaccessible or damaged.

Xavier Hovasse, Head of Emerging Equities and co-fund manager of Carmignac Portfolio Emergents added: "It is not only oil and gas that passes through the Strait of Hormuz. Somewhere between 4% and 5% of all globally traded goods transit that route, including helium, aluminium and many other commodities². This is an unprecedented shock. During previous oil shocks, it was only oil. This time around, it is much broader than that and I think markets will take more time to fully price that in."

The most directly exposed emerging economies are the net oil and commodity importers: India, parts of southeast Asia and Turkey. The on-the-ground impact has been immediate for some as the co-fund managers note that some restaurants in India have temporarily closed because they cannot obtain enough cooking gas.

The more consequential second-order effect could be on interest rates. Emerging markets entered 2026 with central banks firmly in easing mode. Falling borrowing costs were one of the central pillars of the emerging market investment case: cheaper credit supports business investment, earnings forecasts improve and equity multiples expand.

The conflict has threatened to reverse all of that. Markets repriced rapidly from rate cuts to rate hikes, removing a key tailwind for the asset class in a matter of weeks. While we believe that this rapid repricing is overdone, rate cuts decisions might be delayed and in some countries we could see one off hikes to counter inflation pressures.

The parts of the emerging market universe currently showing the most resilience are the commodity and energy exporters with no Strait of Hormuz exposure, principally Latin America.

Brazil and Mexico are highly correlated to energy and commodity prices through their currencies and equity markets. Unlike Gulf producers, they face no chokepoint risk and their exports can reach global markets unimpeded.

This was not the obvious positioning. In previous commodity shocks, including the Russia-Ukraine episode, Middle Eastern and Russian exporters were the immediate beneficiaries.

Naomi Waistell said: "In the Russia-Ukraine crisis, the Gulf states did well. This time around, they have not. In our EM allocations, we have positioned in the safe haven part of the commodity-exporting universe, which is Latin America, with no exposure to the Middle East."

The other key trend that has emerged from the Middle east tensions, is that investment in renewables have picked up. Axia Energia is a specific investment opportunity that sits at the crossroads of this trend.

Axia Energia, formerly Eletrobras, is Brazil and Latin America's largest listed renewable utility company generating approximately half its revenues from electricity production, primarily hydro with solar and wind, and the other half from electricity transmission infrastructure. It is one of the fund's largest overweights.

"The fundamental investment case is very strong. It has performed well, and it is exactly the type of business we like," Xavier Hovasse said.

Going forward, the positive scenario would be a gradual de-escalation and a return to optimism around emerging markets that came to the fore at the beginning of 2026.
With the ceasefire and the ongoing talks, we believe we could see a gradual de-escalation period”, Xavier Hovasse said.

"The structural bull case for emerging markets is still there. Emerging market central banks are very credible and, after this crisis, they are still expected to continue lowering interest rates, which will be good for emerging market corporates."

At current levels, the shock is manageable for much of the asset class. The underlying improvement in emerging market fundamentals, current account positions, monetary discipline and earnings growth, have not been reversed.

What the conflict has done is to increase dispersion in the market and to raise the premium on selectivity. The emerging market universe is large and diversified enough to manage exposure carefully between the more resilient and more vulnerable economies, with the flexibility to rebalance as conditions evolve.

One shift may prove more durable than the conflict itself. "After years of concentrating on intangible assets, the asset-light businesses, I think we are seeing the comeback of tangible assets," Naomi Waistell said.
"Everything related to commodities, energy and infrastructure is becoming more important again. And here, emerging markets have a significant advantage."

The middle eastern conflict has not affected the asset class as a monolith. Active managers in emerging markets understand precisely where the economic pressure is falling, and where resilience has emerged.

The article originally appeared on Trustnet.