Markets still assume that the war in the Middle East will not escalate into a prolonged conflict, and that is good news for investments in emerging markets. After the initial attacks by the US and Israel on Iran, several markets in Asia and South America took significant hits, but over the past two weeks they have shown resilience.
A strengthening dollar is typically “good” for an outflow of investors from emerging markets. Add to that the reliance on energy imports that characterizes countries such as Thailand, South Korea, and South Africa, and the war with Iran could easily turn into a “perfect storm” for emerging markets.
For now, that is not the case, analysts say. Simon Wiersma, investment strategist at ING, said a prolonged conflict is not currently priced in: “There is a lot of uncertainty about how long this war will last, but at the moment you can say that investors are optimistic about it. The rise of the dollar is now leveling off somewhat, and of course we know that some countries will run into trouble if fuel actually becomes scarce, but that is not what markets are assuming right now.”
Another factor is that damage to energy infrastructure remains limited for now, said Joost van Leenders, investment strategist at Van Lanschot Kempen. “Energy flows can recover quickly if the conflict comes to an end. Partly for that reason, investors are currently assuming the less severe scenario.”
The slowdown in the dollar’s rise fits within ABN Amro’s middle scenario, wrote Georgette Boele, senior economist for sustainability research at the bank. In that scenario, the euro could decline somewhat further but would remain above 1,10. The conflict would need to end within two months, according to ABN Amro. Speculators could also disrupt this outlook if they were to unwind all their long positions in euros. Such sales also contributed to the sharp decline in the euro in the first days after the war began.
Yen performing as poorly as euro
Meanwhile, the Japanese yen is performing just as poorly as the euro, also due to the country’s position as a net energy importer (like the Eurozone). In contrast, the US dollar, as well as the Canadian and Australian dollars—currencies of net energy exporters—have strengthened significantly (plus 3 percent). Arnout van Rijn, portfolio manager at Robeco, noted in his weekly market analysis that energy is not the only decisive theme. “The Chinese stock market has held up well during the recent weak weeks in global markets,” he observed, even though China is the world’s largest energy importer.
Do Brazil, Egypt, Vietnam, Turkey, and other emerging economies—each with their own specific characteristics—also stand a good chance of escaping relatively unscathed? Van Leenders (Van Lanschot Kempen) indicated that the bank has actually increased its allocation to emerging markets. “We have diversified our equity allocation, which was concentrated in the US, across all regions. In Europe, we have somewhat more confidence in economic growth prospects, and in Japan and emerging markets we see earnings dynamics improving. The appreciation of the dollar is not currently a reason for us to reconsider our position in emerging markets.”
The fact that a significant number of stock markets in emerging countries fell by 8 to 10 percent at the outbreak of the war with Iran is therefore being “absorbed.” In that context, the more than 40 percent gain achieved by the global MSCI emerging markets index in 2025 is more relevant; more than 30 percentage points of that gain still remain.