Emerging Markets Face Worst Week Since Pandemic, but Analysts Call to Double Down

Emerging market equities and currencies are poised for their sharpest weekly decline since the height of the 2020 pandemic, as safe-haven demand pushed all EM currencies lower against the dollar and triggered a rout in Asian risk assets.

 

The MSCI Emerging Markets Currency Index fell approximately 1.4% this week, while the EM equity index plummeted over 6%. A primary driver is the conflict involving Iran, which has threatened global oil supply and ignited inflationary risks. Markets are particularly focused on the current pressure on net oil importers and the potential inflationary fallout.

 

Eli Remolona Jr., Governor of the Bangko Sentral ng Pilipinas, told media on Friday that oil reaching $100 per barrel could force a tightening of monetary policy, as inflation could breach the central bank's target range.

 

Meanwhile, equity markets in net energy importers like Japan and South Korea also saw heavy losses earlier this week. As of press time, South Korea's Kospi Index has dropped nearly 12% this week, with the won falling 1.3% against the dollar; Japan’s Nikkei 225 has declined by over 4%.

Buying the Dip

Despite the aggressive sell-off of emerging market assets during the Middle East crisis, analysts believe the year-long EM rally can restart. Luis Costa, an analyst at Citigroup, noted that while the firm significantly reduced risk exposure over the past few days, it would re-establish long positions in emerging markets if signs of stabilization appear.

 

Cathy Hepworth, head of the EM debt team at PGIM Fixed Income, also stated that she does not believe the market has seen a true signal to retreat. She noted that some investors have been waiting on the sidelines for a market correction to enter or increase their investment scale.

 

Malcolm Dorson, Senior Portfolio Manager at Global X ETFs, expressed the same view in a recent interview, predicting that a surge in U.S. war spending will eventually weaken the dollar—which rallied sharply this week—creating a favorable environment for emerging markets. He suggested that investors should double down on EM.

Robust Fundamentals

Veteran investors argue that unless there are further major shocks or prolonged high energy prices, emerging economies are poised to rebound, with recovery signs already appearing. However, James Lord, Head of Global FX and EM Strategy at Morgan Stanley, warned that the possibility of further spikes in oil prices cannot be ruled out.

 

Nevertheless, the steady and strong fundamentals of emerging markets are expected to provide significant support for asset prices. Lord pointed out that many EM central banks have adopted cautious and credible policies during their easing cycles, effectively controlling inflation and supporting local currencies against the dollar.

 

Yvette Babb, a portfolio manager at William Blair, also affirmed that as long as EM economies do not deviate from the global growth trajectory, their fundamentals are clearly strong enough to withstand external shocks.