Air strikes tied to Iran prompted a quick flight to safety, lifting oil and stalling a recent rebound in emerging-market assets as the US dollar strengthened.

Markets hit the brakes

Equity and bond moves across emerging markets slowed sharply after air strikes tied to Iran prompted a quick flight to safe assets. The initial military actions triggered a risk-off shift that pushed the US dollar higher and undercut demand for riskier assets in many developing economies.

Investors turned cautious almost immediately: local-currency equities fell in several regions, sovereign spreads widened, and capital flows that had been returning to emerging-market debt paused. Volatility rose unevenly, creating bigger gaps between countries and sectors than earlier in the year.

Why oil matters

Oil's rebound put a new overlay on the emerging-markets story. Higher energy prices help exporters but hurt importers. Key implications include:

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  • Exporters: Immediate revenue and improved fiscal balances for crude and refined-product sellers in parts of Latin America, the Middle East and sub-Saharan Africa.
  • Importers: Bigger import bills, higher inflationary pressure and the risk of tighter monetary policy unless authorities act to offset the shock.
  • Index distortion: Headline emerging-market indices may mask this divergence—energy exporters can outperform even as many import-dependent economies lag.

The dollar's oversized role

The US dollar moved higher during the initial bout of risk aversion. That matters because most hard-currency debt across emerging markets is dollar-denominated, so a stronger dollar raises the local-currency cost of servicing external obligations and amplifies the inflationary impact of dollar-priced commodities.

AllianceBernstein says the dollar's path will determine whether emerging markets recover lost ground: if the uptick proves temporary and the longer-term weakening trend resumes, financial conditions would ease for many developing countries—reducing borrowing stress, lowering hard-currency debt burdens and encouraging cross-border capital flows back into risk assets.

Policy buffers and the divergence in fundamentals

Emerging markets don't move as a bloc. Recent years of tighter macro policy, better governance measures and lower fixed-income risk premiums in some countries mean many start this episode with stronger cushions than in past shocks. This appears in healthier FX reserves in some places, lower public-debt ratios in others, and more credible central-bank frameworks overall.

However, where fiscal room is tight and external funding needs are large, the oil shock and dollar swing can still inflict real pain. Investors are sorting through balance-sheet metrics, reserve adequacy and likely central-bank responses to identify which sovereigns and corporates can withstand the stress.

Where opportunities are appearing

Headline volatility has produced valuation gaps. AllianceBernstein's view is that the breadth of the emerging-market universe gives active managers plenty to pick from—some securities and countries have seen prices fall out of step with fundamentals.

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AllianceBernstein says a sustained weakening of the US dollar would create room for rate cuts in some developing countries, easing financing pressures.

This article was created with AI assistance.