LONDON: The rush of cash out of risk assets has rattled emerging markets since war engulfed the Middle East, but some investors are betting that economic fundamentals and fragmented geopolitics will allow a year-long rally to resume.
The United States and Israel’s bombardment of Iran pressed emerging market currencies and stocks toward their biggest weekly losses since the COVID-19 pandemic, while bonds also tumbled sharply.
JPMorgan reduced its overweight stance on emerging market foreign exchange and local currency bonds to marketweight, citing uncertainty. Citi also halved its emerging market foreign exchange exposure.
But veteran investors say emerging economies, barring further big shocks or prolonged high energy prices, can rebound, with green shoots already pushing through.
“I don’t think yet that we’ve seen … let’s call it real money, or crossover money, saying ‘I’m out’,” said Cathy Hepworth, head of PGIM fixed income’s emerging market debt team. “There are people on the sidelines who were waiting for a market correction to get in or to increase the degree to which they are involved.”
From stocks to bonds to currencies, emerging markets had outshone all expectations until this week.
Flows into the asset classes had ballooned since US President Donald Trump’s second term began in January 2025. Emerging nations – led by Saudi Arabia, Mexico, Turkey and Poland – issued a record amount of debt in January, equities soared and yield-hungry investors ploughed cash into frontier market local currency debt.
However, investors had already warned that some of the “hot” money from hedge funds and other non-specialist investors could leave quickly if the market turned.
The US-Israeli bombing campaign in Iran caused just this, with a flight to safe havens. The dollar rose, along with gold, and investors piled into cash.
“We’ve seen a big shock to markets…there is more to go, should oil prices rise further,” said James Lord, global head of FX and EM strategy at Morgan Stanley.
Data showed MSCI’s emerging market equities index lost more than a trillion dollars in market capitalisation from its peak last Thursday to Wednesday’s close.
One of the most notable drops was for Korea’s KOSPI equity index, which shed nearly 20% over the course of Tuesday and Wednesday in its biggest-ever crash.
The index, heavily influenced by the rush to AI and chips, had been the top performer in emerging equities.
“That’s clearly panic selling in some sense,” said Jonas Goltermann, deputy chief markets economist with Capital Economics, adding that it was a sign of the “market machine” overriding underlying fundamentals. On Thursday, the KOSPI clawed its way back, gaining nearly 10% and it is still up more than 30% this year.
Investors said that the years spent by many emerging and frontier markets to shore up their finances and bolster confidence in their central banks could also aid their appeal during a prolonged crisis.
Many central banks, Morgan Stanley’s Lord said, had taken “a very cautious and credible approach to the easing cycles”, getting inflation in check and underpinning currencies against the dollar.
Egypt and Nigeria, countries where it was once difficult to repatriate cash, reformed investor access. The outflows in recent days, some say, prove they are a reliable destination for the money.
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