The war between the US/Israel, and Iran has sent shockwaves through global financial markets, interrupting the recent broad rally in emerging market off fashion, EM assets (bonds, equities, and foreign exchange [FX]) have declined in tandem as investors reassess geopolitical risk.

The key question for investors is whether the oil shock triggered by the conflict could lead to a broader global downturn that materially weakens EM a the scale and duration of the energy disruption, particularly if the Strait of Hormuz (through which roughly one-fifth of global oil supply flows) faces p however, it is premature to turn outright bearish on EM assets. The Iranian leadership has shown little appetite for negotiations, but the US also faces constraints.

The war is unpopular with voters, the midterm elections are approaching, and a prolonged disruption to energy markets would further squ consumers. These factors create strong incentives for a relatively swift resolution.

While the conflict may keep EM asset volatility elevated in the near term, it does not fundamentally alter the longer-term structural bull case for EM bo factors remain intact: improving macroeconomic fundamentals across many EM economies, supportive commodity price dynamics, and EM bonds th under-owned by global investors should reassert themselves once war-driven uncertainty fades.

Improved macroeconomic fundamentals Historically, EM economies have experienced higher and more volatile inflation than developed markets (DMs). In recent years, however, EM inflation h DM levels (Figure 1). Several EM economies – including SA, Brazil, and Chile- have also lowered their inflation targets.

many EM economies remain elevated and in restrictive territory, providing a cushion against future inflation 2). joining our shocks WhatsApp(Figure Channel—simply click the link to follow

Fiscal discipline has also improved across much of the EM universe. The large fiscal expansions seen during the pandemic have largely been reversed economies returning to pre-pandemic levels – especially where fiscal sustainability is a concern. Together with tighter monetary policy, this helps anc support price stability, creating a favourable backdrop for EM bond performance. Commodity tailwinds The second factor is commodity tailwinds.

Commodity prices tend to move in long-term cycles – trough-to-trough fluctuations of roughly 15 years are business investment and infrastructure spending. Figure 3 shows that we are entering a period of firmer commodity prices, and we are constructive on silver and copper.

This emerging commodity cycle should support the growth outlook and asset prices of resource-heavy EM economies. The long-term growth paths of and SA have historically tracked the commodity cycle closely (Figure 4). Higher commodity prices improve terms of trade, strengthen fiscal positions, balances, all of which tend to support local bond markets.

Valuation and positioning The third bullish factor supporting the EM bond outlook is valuation and positioning. Even after recent rallies, many EM local-currency bonds continue yields compared with DM alternatives. In several countries, many 10-year local sovereign bonds still offer real yields above 4% (Figure 5).

At the same participation in EM local-currency bond markets has declined sharply in recent years, particularly in countries with high real yields and undervalued cu means that many markets remain both undervalued and under-owned by global investors. When positioning is this depressed, even modest improvem meaningful capital inflows.

Currencies also remain supportive. While some EM currencies have appreciated against the US dollar, many continue to trade below their long-term fair value, representing a potential source of return.

If you have any questions or concerns, feel free to reach out to us.

In our view, the current turbulence reflects merely a pause driven by geopolitical shock rather than a deterioration in underlying economic fundamenta it marks the end of the EM bull case. In the short term, war-related uncertainty warrants caution, and it will likely keep volatility elevated, particularly if disrupted. Nevertheless, the structural drivers supporting EM assets (improving macroeconomic policy, favourable commodity dynamics and attractiv place.

If geopolitical tensions ease, EM assets could recover quickly as investors refocus on these fundamentals. For long-term investors, the current v to be a pause in the EM recovery rather than the end of it.