The “end” of emerging markets narrative—questioned (and answered)

Executive summary

At the start of 2026, we argued that emerging market (EM) equities and debt were compelling, not because volatility had disappeared, but because the biggest risk was oversimplification. Countries that shared an EM label no longer shared the same drivers, risks or opportunities.

Iran-related escalation briefly challenged that view. Correlations rose and markets defaulted to the familiar “EM is one trade” reflex. We see the episode as a demonstration of why the old EM framework no longer works: Index outcomes are a blend of very different country exposures, filtered through the prevailing global growth, inflation and liquidity regime.

History reinforces this point. Across prior oil-shock-style episodes, index-level EM equity and EM bond outcomes are not uniform during the shock or in the 12 months after it ends. The key variable is not “oil up = EM down,” but which EMs are energy importers vs. exporters, and how policy responds.

For institutional portfolios, we believe it may be best to approach an Iran-linked energy shock as a dispersion event. The transmission typically runs through the following:

• External balance: Net energy import burden vs. terms-of-trade tailwind (with parts of Asia most exposed to Middle East supply risk).
• Inflation and central bank reaction functions: Duration matters more than the initial spike.
• Fiscal buffers and subsidy regimes: Whether an external shock becomes a domestic-demand shock.
• Financing structure: Local market depth and credibility vs. reliance on US dollar (USD) funding.
• EM debt (institutional hinge variable): Whether the shock triggers a “dollar positive spiral” (as in 2022).
• Beyond crude: Liquefied natural gas (LNG), refined products/petrochemicals and critical inputs (e.g., fertilisers, helium, sulphur) can drive second-round shocks.

As we discuss in this paper, we think this is how to locate the gEMs: Build distinct return drivers across equities, local rates and hard-currency credit tilting to (1) structural compounders with pricing power, (2) reformers with credible policy and attractive real yields and (3) selective tactical beneficiaries/hedges.

Bottom line: Crisis has stress-tested the “end of EM” narrative—not disproven it

Questioning the “end of EM” narrative is understandable, because in the first phase of a geopolitical shock, the market temporarily trades EMs as one correlated bucket. Yet history shows there is no single EM oil shock template, especially in the 12 months following the shock. The composition of EMs today, depicting technology hubs, diversified manufacturers, reformers and still early stage frontiers, means that the real investment work is to map transmission channels and position for dispersion, not to retreat to the acronym. For EM investors, the single most important lesson of the last generation remains that active managers are best placed to cope with the frequent swings in fortune within the asset class. We think structural strengths and weaknesses will continue to drive the polarisation of returns, but we believe awareness of the geoeconomic pressures and constraints will be crucial, and should reward a knowledgeable, selective approach.