Investors Say Emerging Markets “Down, Not Out” After Middle East Shock

The Middle East conflict has rattled emerging markets, but some global investors believe the asset class is “down, not out,” arguing that improvements in macro fundamentals and policy frameworks will help EM weather the storm better than in past crises.

Reuters reports that war in the Middle East triggered a “rush of cash out of risk assets,” with sharp falls in EM currencies, bonds and equities as investors sought safety in dollars, Treasuries and gold. The sell‑off came on top of anxiety over high global tariffs and AI‑driven disruption, compounding pain for markets already grappling with tighter financial conditions.

Yet several fund managers interviewed by Reuters argue that many emerging markets are better positioned now than during previous oil or geopolitical shocks. They point to stronger reserves, more flexible exchange rates, lower external debt and more orthodox monetary policy in key EM economies, including parts of Asia.

The picture is nuanced. Import‑dependent countries with weak external balances and high inflation remain vulnerable, especially if oil prices stay elevated for long. But commodity exporters and economies with strong institutional frameworks may benefit from higher prices or be seen as havens within EM.

For Gulf and Asian markets, this differentiation is critical. Gulf credits still enjoy strong ratings and large sovereign wealth buffers, while parts of Asia—such as South Korea and some ASEAN economies—retain solid growth prospects despite energy and trade headwinds.

Portfolio managers are therefore trimming risk selectively rather than indiscriminately dumping EM assets. Some are rotating within EM toward higher‑quality credits and sectors seen as beneficiaries of AI, energy transition and supply‑chain diversification.

The key variable for EM performance in 2026 will be the duration and breadth of Middle East conflict and its impact on oil, inflation and global growth. If shocks prove short‑lived and contained, EM could stage a recovery later in the year; if they drag on or intensify, even stronger‑fundamental markets may struggle to escape damage.