Emerging Markets Tipped to Rise 15% Despite Iran War Risk

Portfolio managers on April 9 said they see as much as 15% upside for emerging market equities through 2026, arguing that improving economic fundamentals and attractive valuations can outweigh the geopolitical risk emanating from the war in Iran.

"The risk premium from the Iran conflict is undeniable, but the underlying earnings growth in markets from Brazil to India presents a compelling structural bull case," said fictional analyst John Doe, Head of Emerging Market Strategy at BlackRock, in a note to clients. "We are advising clients to look past the headlines."

The MSCI Emerging Markets Index has already climbed 5% this year, despite a spike in oil prices to over $90 per barrel and a flight to safety that has seen gold touch a record $2,400 an ounce. ETFs like the iShares MSCI Emerging Markets ETF (EEM) and the Vanguard FTSE Emerging Markets ETF (VWO) have seen persistent inflows, totaling over $10 billion year-to-date, according to data from EPFR Global.

The key question for investors is whether the fundamental story can hold up if the Iran war escalates, potentially disrupting the 21% of global oil trade that passes through the Strait of Hormuz. The last major conflict in the region in 2003 saw emerging market stocks initially dip 10% before rallying over 30% in the subsequent six months as the immediate uncertainty cleared.

The bullish thesis rests on a combination of factors. Many emerging market central banks, having hiked rates aggressively in 2022-2023 to combat inflation, now have room to ease policy. This contrasts sharply with developed market peers like the Federal Reserve, which is expected to keep rates higher for longer. This monetary policy divergence is expected to boost local consumption and corporate investment.

Furthermore, valuations appear attractive. The MSCI Emerging Markets Index trades at a forward price-to-earnings ratio of approximately 12x, a significant discount to the S&P 500's 21x multiple. "You are being paid to take on the geopolitical risk," Doe's note continued. "For long-term investors, this entry point is one of the most attractive in a decade."

This article is for informational purposes only and does not constitute investment advice.