What the Iran war means for Emerging Markets investors

Energy importers are the main losers while some energy exporters and China remain resilient, argues Pendal’s Emerging Markets team

• Iran war shocks commodities, EM inflation pressures intensify
• Energy importers lose, exporters and China hold
• Find out about Pendal Global Emerging Markets Opportunities Fund

THE Iran conflict represents an exceptional negative supply shock to global commodity markets, with significant implications for emerging markets and developed economies.

Crude oil is at risk, but also refined products, LNG, fertilisers, petrochemicals and specialist products such as mining explosives, sulphuric acid and helium.

The impact on emerging markets includes sharply higher bills for energy‑importing economies, placing pressure on current account balances and exchange rates.

Inflation will rise everywhere, initially via energy prices and later through food prices, driven by fuel and fertiliser costs.

Currency weakness in energy importers will further amplify inflation, while outright shortages are likely to constrain activity.

These inflation effects are expected to be most acute in EM Asia and (as in 2022) in the world’s poorest nations.

The shock creates a clear split in emerging markets.

We see a four-part taxonomy:

1. Energy importers are the primary losers, facing a combination of weaker growth and rising macro stress
2. Energy exporters, by contrast, benefit from improved terms of trade and stronger fiscal and external positions
3. China is significantly insulated by recent policy choices
4. Gulf Cooperation Council markets (Saudi Arabia, UAE, Qatar, Kuwait, Oman and Bahrain) are beneficiaries of higher hydrocarbon revenues but face war damage and export constraints

Here is a closer look at each category:

Energy importers

Energy importers are the clear losers, with several large economies highly exposed.

Countries such as India and South Korea run some of the largest oil deficits globally, consuming roughly 5.6 million barrels per day (mbpd) and 2.5 mbpd respectively while producing very little.

Taiwan and Thailand are similarly exposed relative to the sizes of their economies.

Beyond Asia, Turkey and Poland face meaningful headwinds, with oil deficits close to 1 mbpd and 0.7 mbpd respectively. We have been cautious on these markets and have moved more underweight this month.

China

Although it is a major oil importer, China is relatively resilient.

Domestic demand is weak. Its electricity system, and to a lesser degree its transport system, are heavily decarbonised.

Crude stockpiles are large (estimated at 1.20-1.4 billion barrels) and imports from Russia (and even potentially Iran) provide supply flexibility.

Significantly, Chinese bond yields have fallen since the start of the war. We have become more positive on the outlook for Chinese equities relative to other Asian markets.

Energy exporters

The key opportunity for emerging markets investors lies with non‑GCC energy producers.

Latin America stands out.

Brazil produces around 4.5 mbpd versus consumption of 3.3 mbpd. Mexico, Colombia and Argentina are also net exporters.

We have been highly positive on Brazil and positive on Mexico and maintain our overweight positions.

South Africa is a net importer but is partially cushioned by its status as a major coal producer and limited coal‑to‑liquids capacity (about 150 kbpd), reducing the GDP impact to around 0.5%. We retain our small overweight position.

GCC countries

In the GCC, Saudi Arabia and UAE continue to export reduced volumes via pipelines at much higher prices but are sustaining a significant number of attacks from Iran.

We have reduced our overweight position in UAE to recognise the economic risks from the continuing conflict.

Opportunities

With very high volatility and actual supply constraints in many critical commodities, the outlook for large parts of the global economy and global financial markets is uncertain.

However, it’s important to recognise the great opportunities in emerging markets that are exporting at higher prices, and also in China, where farsighted policy choices should lead to strong relative outcomes.

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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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