Geostrategic Media Political Commentary, Analysis, Security, Defense
Emerging markets have faced significant challenges due to a rush of cash out of risk assets, particularly after the escalation of conflict in the Middle East. The U. S. and Israel’s military actions against Iran have led to steep declines in emerging market currencies and stocks, resulting in the largest weekly losses since the COVID-19 pandemic. Bond prices have also dropped sharply, prompting firms like JPMorgan and Citi to reduce their exposure to emerging market foreign exchange and bonds due to increased uncertainty.
Despite the turmoil, some experienced investors believe that emerging economies may recover, as long as there are not additional major shocks or sustained high energy prices. Cathy Hepworth from PGIM noted that some investors have been waiting for a market correction to increase their investments. Until the recent turmoil, emerging markets, particularly in countries like Saudi Arabia, Mexico, Turkey, and Poland, had been performing exceptionally well, with record amounts of debt issued and strong inflows into local currency debt.
However, the ongoing conflict has led to a rush to safer investments, such as the dollar and gold. As a result, emerging market equities suffered big losses, with a drop of over a trillion dollars from the MSCI emerging market equities index. The KOSPI equity index in Korea experienced a historic decline, losing nearly 20% before recovering some of its value.
Investors point to the solid fundamentals that many emerging and frontier markets have developed over recent years, which may help them weather the ongoing crisis. Many central banks have effectively managed inflation and maintained currency stability, making these economies more appealing for investors. Countries like Egypt and Nigeria have also made reforms to improve investor access, demonstrating their capacity to absorb foreign exchange demand.
Despite the recent outflows, there have been some inflows into emerging market bond and equity funds, indicating that confidence may remain. However, rising oil prices pose a significant risk, as prices above $100 per barrel could increase global inflation and hinder economic growth. The length and intensity of the geopolitical crisis related to Iran will likely influence the duration of market pullbacks from emerging markets.
On the upside, Latin American commodity exporters may benefit from increased oil prices, while emerging market equities remain attractively valued compared to developed markets. Portfolio manager Elias A. Elias highlighted the potential for higher earnings growth in emerging markets, which are currently valued at a 28% discount to developed markets.
Additionally, a shift in global investment dynamics, including increased “South-South” investments, could provide a buffer for emerging markets. These investments, coming from wealthier nations in Asia and Gulf sovereign wealth funds, are likely to be more stable and less prone to rapid withdrawal during market turbulence.
Overall, while emerging markets are confronting significant challenges, a combination of strong economic fundamentals and evolving global investment patterns may support their recovery in the long run.
