Iran war stalls stock rally
The global emerging markets index rose by almost 15% (in US dollars) in the first two months. By comparison, developed markets managed only around 3% gains over the same period. However, at the start of March, the war waged by the US and Israel against Iran brought these advances to an abrupt halt. That said, price reactions have so far been moderate. The index for emerging market equities fell by around 7% in the first two weeks of March, whilst that for developed nations fell by around 4% (calculated in dollars). This means that emerging market equities overall are still showing a significant gain so far this year.
Many investors reduced their risk exposure or temporarily halted purchases of riskier assets, such as stocks and bonds from
No panic, but a wait-and-see attitude
The economic and geopolitical implications of the war in the Gulf region are difficult to assess, as there are very different scenarios for how events might unfold. In a worst-case scenario, the negative effects could hit many emerging markets particularly hard, especially those countries heavily dependent on energy imports from the Gulf states and rely on trade routes passing through the Persian Gulf and the Red Sea.
It is therefore not surprising that stock prices and currencies of the various emerging markets have reacted to the events to varying degrees.
The Strait of Hormuz as Iran’s trump card
As of mid-March, the Strait of Hormuz is effectively blocked by Iran, which is now only allowing a small number of ships to pass through the strait. At the same time, oil prices – and in some regions gas prices too – have risen sharply. From an economic perspective, it is not so much the extent of the rise in energy prices that is the decisive factor, but rather how long prices will remain at sharply elevated levels.
Risks for emerging markets
The major economies of China and India, in particular, are heavily dependent on oil and gas imports from the Gulf region and are also facing significant geopolitical challenges in the wake of the Iran conflict.
For China, which is already struggling with insufficient domestic demand, low profitability among many companies, and sluggish growth, this comes at a very inopportune time. It should be noted, however, that China has built up very large strategic oil reserves and, so far, appears to still be able to source Iranian oil.
India could therefore find itself in trouble sooner than China if the blockade of the Strait of Hormuz persists but could compensate for some of the lost imports with Russian oil.
Latin America, on the other hand, is significantly less directly at risk, and countries such as Brazil and Colombia could even benefit from the rise in oil prices as oil exporters.
In Central and Eastern Europe, there is high sensitivity to energy prices and transportation costs. In the event of sharper rises in inflation, central banks could be forced to act. However, the duration of the energy price distortions remains decisive in this regard.
Southeast Asia, as the hub of many global supply chains — not least in the semiconductor sector — is likely to suffer less from higher oil prices than from logistical problems and rising transportation costs if trade routes to Europe are disrupted for an extended period.
Emerging market bonds: no panic, but caution
The first two months of 2026 were positive for emerging market bonds as well. US-Dollar-denominated bonds, in particular, posted very strong gains. However, the war against Iran triggered price declines. These were driven, on the one hand, by widening yield spreads relative to US Treasuries. On the other hand, US Treasuries themselves also weakened. This move surprised many since US Treasuries typically benefit as a safe haven during geopolitical crises. They may still do so if the conflict persists for a longer period or escalates further.
Local currency bonds have seen some capital outflows from international investors since early March; though on a modest scale overall. Should the dollar strengthen significantly and sustainably in the wake of the conflict, this would be negative for most emerging market economies and likely also weigh on their equity and bond markets.
A quick end to the war or a prolonged war of attrition?
Most market participants and analysts currently assume that Iran will not be able to hold its ground against the US and Israel for long and/or that it cannot maintain the blockade of sea lanes for an extended period. This is likely one of the main reasons for the relatively moderate reactions on the stock markets so far, which have also absorbed the sharp rise in oil prices with relative calm. In such a scenario of a brief war, the global economy is unlikely to suffer any major, lasting damage, and the positive outlook for global growth would quickly return to the fore.
However, such a course of events is by no means certain. The scale and duration of Iran’s counterattacks have so far exceeded what most observers — and apparently the U.S. administration as well — had expected or factored in, and Iran’s leadership structures appear largely stable despite the elimination of a significant portion of the upper echelons. Hence, there is also a distinct possibility that the war could drag on for longer or even escalate further. In such a case, oil prices are likely to remain high for the long term or rise even further; global trade flows could be severely disrupted, and both growth and inflation could face significant challenges. The financial markets are currently not pricing in such a scenario; rather, they evidently regard it as relatively unlikely (for now).
A New Order in the Middle East?
Long term, depending on its outcome and course, the Iran war could result in a massive realignment of the geopolitical landscape in the Middle East (and beyond). Either by Iran disappearing as a regional power or being severely weakened, thereby ceasing to be a potent factor in the Russia-China-Iran axis (as well as BRICS). Or, by eroding and questioning US hegemony in the region, leading (some) states in the region to reorient themselves geopolitically.
>> An interview with fund manager Jürgen Maier on emerging markets
Conclusion: From an investor’s perspective, it is important to note that any prediction regarding the duration and outcome of the Iran conflict is currently fraught with enormous uncertainty, meaning that there is both upside potential and downside risk for many, or certain, emerging markets. Regardless of this war and its outcome, however, the long-term growth prospects of many regions (particularly Asia) remain intact, as do – at least for the foreseeable future – the themes of artificial intelligence and investment in the necessary infrastructure. We therefore continue to view the markets in Korea and Taiwan, for example, as promising despite the geopolitical disruptions, and do not yet regard the price declines there as signalling an end to the upward trend.
With regard to countries such as India and China, we are remaining more cautious for the time being and maintaining a partly selective position; however, this was already the case prior to the war in Iran and is not directly related to it. It goes without saying that the current situation requires ongoing careful monitoring and a highly flexible approach.