To start the year, emerging markets had looked like a trade built for a softer dollar, easing inflation and a world economy that was still growing. Then came the shock resulting from the February 28 attacks on Iran by the U.S. and Israel.
Emerging markets were up 5.5% in February, for example, according to ClearBridge, a Franklin Templeton company that manages global equities. Since the conflict began, emerging markets had dropped 8% through mid-March, according to the company.
While no consequence of military disputes is more serious than the loss of human life, conflicts like the U.S.-Israeli conflict with Iran also carry significant economic costs, especially in emerging economies.
A war that has jolted oil markets and effectively choked traffic through the Strait of Hormuz has forced investors to rethink some of the most popular bets in the developing world. Brent crude has climbed as high as $119 per barrel and has remained above $100 per barrel, while broader global markets have slumped as traders recalibrate for both the risk of higher inflation due to rising energy costs and for more cautious central banks. The strait remains crucial: Roughly 20% of global petroleum liquids consumption typically move through it, according to the U.S. Energy Information Administration. Published reports last week quoted natural gas prices in Europe elevated by as much as 35% as Iranian and Israeli strikes targeted some of the Middle East’s most important gas infrastructure.
The conflict-driven shifts have not produced a simple retreat from emerging markets so much as a more selective, skeptical mood. Investors are still willing to own parts of the asset class. But what had looked like a broad macro trend has become, once again, a country-by-country evaluation of oil dependence, inflation vulnerability, currency stability and the spillover of geopolitical tensions.
“The first thing is: You don’t want to make a general statement about emerging markets in this because they are a very heterogeneous bunch,” says David Kelly, chief global strategist at J.P. Morgan Asset Management.
That diversity of views is now defining the market. Oil exporters can, in theory, benefit from higher crude prices. Importers face the opposite problem: pricier fuel, wider trade deficits, weaker currencies and central banks that may have to postpone hoped-for rate cuts. In the week that ended on March 18, emerging-market bond funds recorded $2.83 billion in net outflows, , according to LSEG Lipper data after experiencing more than $20 billion in inflows for the first two months of 2026, according to LSEG Lipper data, even as equity outflows were comparatively modest. The message from investors was not panic, so much as caution.
From Positive to Neutral
At Ninety One, a global investment firm with a focus on emerging markets, Sahil Mahtani, the director of the firm’s Investment Institute, says the conflict has changed investors’ positioning even without producing a wholesale liquidation.
“Investors are reassessing overweights in emerging markets,” Mahtani says, after what had been a year that started with optimism around growth, softer inflation and a weaker dollar. He adds that the broad effect of the war so far has been “to move people who are more positive to more neutral.”
That more neutral stance is especially evident in the large oil importers of Asia. South Korea, Taiwan and India all face some version of the same problem: higher energy costs feeding inflation just as investors had expected easier monetary conditions and stronger domestic demand. J.P. Morgan’s Kelly says the countries most vulnerable to “a longer, bigger oil shock” are more likely to cause investors concerns. For example, on March 21, the Indian rupee climbed past 94 to the dollar for the first time, marking its weakest value in history, while pressure on India’s current account intensified as oil prices rose.
Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, says the cleanest dividing line for impacts from the war in Iran is straightforward: “Are you an oil importer or an oil exporter?” For fixed income, he says, the danger is particularly direct. “If inflation’s spiking, we would expect local interest rates to rise up along with that.”
Spiking inflation, in turn, raises borrowing costs, squeezes economic activity and can destabilize currencies. Rising bond yields would reduce the value of bonds held in a portfolio as well.
Country/Stock Picking
As the conflict continues, asset managers are closely evaluating emerging markets to determine which economies are least affected.
Andrew Mathewson, a portfolio manager on the emerging markets strategy at ClearBridge Investments, describes the conflict’s impact on emerging markets in blunt terms.
“Whenever we see a political event … the initial reaction would be to [take] risk off,” he says.
In his view, that reflex has obscured an important distinction between markets suffering a direct hit from the conflict and those merely caught in the draft of broad deleveraging and dollar strength.
That distinction helps explain why many investors do not treat emerging markets as a single trade. Investing in Latin America has looked relatively better, especially in countries like Brazil and Colombia that export commodities and sit far from the conflict zone. Brazil has not been immune to higher inflation risks, but pricier oil can still support its external accounts and fiscal outlook, cushioning the blow that importers face. Several investors say Latin America has become more interesting as energy prices rise, even if they doubt markets were yet pricing a prolonged stretch of oil costing more than $100 per barrel.
Pressure on the Gulf
The Persian Gulf region, however, has turned into a more complicated investment case than simple exporter math would suggest. Saudi Arabia, for one, can still lean on its oil heft and its more domestically anchored market.
The United Arab Emirates is different. Before the conflict, the country had been one of the region’s standout economic stories. The International Monetary Fund projected that the UAE economy would grow 4.8% in 2025 and 5% in 2026, powered by robust non-hydrocarbon activity, as well as a rebound in oil production.
But the war has undercut the very qualities that made the Emirates attractive to foreign investors: stability, openness and thee reputation as a safe regional base for money, people and property. According to a Goldman Sachs analyst note, Dubai property transaction volumes fell 37% from one year earlier in the first 12 days of March and 49% from February levels as the conflict damaged the Emirates’ image as a haven.
Chiara Salghini, a portfolio manager and senior research analyst at Vontobel, says the UAE had become one of the clearest examples of how geopolitical risk can swamp the textbook benefits of being an oil producer.
“The thesis there relies on the UAE being a safe haven,” she says. “That view in UAE has dramatically changed.”
She says her firm has “significantly cut back” positions there, arguing that the safe haven premium is gone.
Trouble in Turkey
Turkey presents a different vulnerability, but one just as important to investors. The country entered this period of global conflict already in a disinflation cycle, trying to restore policy credibility after years of instability. Official data showed annual inflation at 31.53% in February. Turkey’s central bank is expected to hold its key rate at 37%, while emergency foreign-exchange intervention had already cast doubt on how quickly the bank could continue easing. According to the World Bank, Turkey has been moving to normalize macroeconomic strategy, but still faces longstanding macro and structural challenges, including high inflation.
Salghini says the conflict is affecting Turkey at exactly the wrong moment.
“Turkey was already in a very fragile situation,” she says. Higher oil prices, she adds, make it “difficult to continue on that path” toward rate cuts and macro stabilization. For investors, that means a country that had hoped to sell a story of normalization is now forced back into a more defensive posture.
The U.S. Role
For the U.S., the economic effect may prove more manageable. Tara Sinclair, an economist at George Washington University, says she does not expect the conflict by itself to produce a major downturn in American consumption.
“I don’t think this is going to have a huge impact on the U.S.,” she says. “Consumers are going see the higher gas prices.”
But the bigger concern, she argues, would come if the war eventually triggered a stock market correction large enough to hit affluent households and, through them, the broader economy.
That distinction matters for emerging markets too. Even if the U.S. avoids a recession, higher-cost energy and tighter financial conditions still amount to a tax on the rest of the world.
“High oil prices in general are a drag,” Sinclair says. For the more exposed economies, she continues, the conflict could become “a two-fisted whammy,” combining a supply shock with recession risk.
Even observers and investors still hopeful for the asset class are sounding more careful now. Kelly says that, outside the Gulf, he would not be rushing to exit emerging market equities.
“I still think the case is very strong for many emerging markets,” he says. But his confidence came with a caveat: The biggest danger in markets is often not the baseline outlook, but the tail risk. Energy shocks and geopolitical disruptions can expose portfolios that were built for calmer assumptions.
That risk is what makes this moment feel less like a verdict against emerging markets than a reminder of what always made them challenging to own. Emerging market countries are not interchangeable. Some may come out of the latest war with stronger trade balances and more attractive valuations. Others may find that the war shock revives old anxieties about inflation, credibility and capital flight.
The Iran conflict has not erased investor interest in emerging markets. It has narrowed it, complicated it and made it more discriminating. The easy enthusiasm of the year’s opening weeks has given way to a more granular calculus that runs through oil terminals, currency markets, central-bank meeting rooms and property offices from Istanbul to Dubai.
As Mahtani put it, “what the Iran conflict disruption has done is cause investors to take a step back and say, ‘Are my usual assets still relevant? Are they still effective in the current context?’”
Tags: Emerging Markets, Iran