Emerging Markets: Iran conflict rewrites the outlook for Asian emerging markets

In this article Pendal’s EM team explains why they’re avoiding the most exposed energy importers and favouring markets with strong external positions

• Strait of Hormuz closure is an intensifying macro shock for Asia
• Reinforces underweight positioning in energy‑importing Asian markets
• Learn more about Pendal Global Emerging Markets Opportunities Fund

THE Iran conflict represents an exceptional negative supply shock with severe implications for some emerging markets – and conditions have deteriorated further since our last analysis in April.

The continued closure of the Strait of Hormuz has extended the shock well beyond energy markets into currencies, rates and growth expectations across Asia.

The transmission mechanism we described previously is now clearly visible.

Asia is highly dependent on Middle Eastern energy supply, and a prolonged disruption functions as a tax on growth.

Higher fuel and transport costs feed rapidly into headline inflation, weaker current accounts and sustained pressure on currencies.

Policymakers are left balancing growth concerns against the need to anchor inflation and protect external stability in an already challenging global monetary environment.

Currency and bond markets react first

Since the conflict escalated, the Indian rupee, Indonesian rupiah and Philippine peso have all moved sharply weaker.

Options markets are now pricing meaningful probabilities of further depreciation over the next three months, signalling that investors see limited near‑term relief without clear de‑escalation.

Bond markets likewise point to tighter financial conditions despite slowing growth momentum.

Official responses underline the severity of the shock.

The Reserve Bank of India has opened a dedicated dollar‑swap window for oil refiners, increased spot FX intervention and restricted offshore derivatives trading, while acknowledging that growth risks are now skewed to the downside.

Bank Indonesia has intensified intervention onshore and offshore and tightened dollar‑buying rules to stem outflows.

The Philippines’central bank has signalled a series of policy interest rate increases to contain inflation despite weakening activity, while Thailand has cut growth forecasts sharply as inflation expectations reset higher.

Across the region, multilateral institutions have revised down growth forecasts and marked up inflation projections.

Equities impact

Equity markets, in our view, remain behind this reality.

Valuations in several Asian markets continue to assume relatively stable earnings growth, with limited adjustment for margin pressure from higher input costs, weaker domestic demand or tighter financial conditions.

Prolonged terms‑of‑trade shocks in energy‑importing economies typically feed into corporate profitability with a lag, particularly where currencies are adjusting and fiscal space is constrained.

We think FX and bond markets are ahead of equities in pricing the effects of the Hormuz disruption.

Our positioning

We remain heavily underweight India, zero weight the Philippines and Thailand, and underweight Korea and Taiwan (despite holding significant exposure to global semiconductor in these two).

Our portfolio positioning remains focused on avoiding the most exposed energy importers and favouring markets with stronger external positions, greater policy insulation or direct benefits from higher energy prices.

We remain significantly overweight Brazil, Mexico and China.

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Pendal Global Emerging Markets Opportunities Fund

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
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