A Perspective on the Middle East Crisis

Key Takeaways:

• The short-term direction of emerging markets and Asia will depend on longevity of the Iran conflict and its negative impact on neighboring states. It may the leave the outlook for Saudi Arabia and United Arab Emirates (UAE) diminished in the short term.
• Globally, the biggest concerns are focused on higher oil prices and the higher prices of products that are shipped through the Strait of Hormuz. Short-term price spikes are concerning but it is the endurance of higher prices that will be meaningful.
• Emerging markets are a diversified asset class and price rises will provide tailwinds for some markets and headwinds for others.
• Geopolitical events are unpredictable but as events unfold, actively managed strategies have the ability to quickly synthesize events with a view on the medium term, reducing or adding exposure as appropriate, within a disciplined investment framework.

The Middle East has long been a source of geopolitical instability. The current conflict is characterized by its longevity and the expansion of tensions beyond traditional flashpoints, including attacks by Iran that have drawn in Gulf neighbors. The risk surrounding the Strait of Hormuz and its critical role in the global supply of oil, gas and related byproducts has provided the most anxiety to markets.

Since the start of the conflict the biggest macro impact has been the increase in energy prices. In my view, a sustained oil price that is well above $120–$140 per barrel would likely trigger a negative global pattern, pushing inflation higher, keeping interest rates elevated and weighing on growth and risk assets. While this is a possible scenario, the more probable outcome expected by the market is a moderately higher oil price that embeds a geopolitical risk premium. The impact of a higher post-war oil price on economies will be a function of duration rather than magnitude.

Shipping costs are the other major near-term concern. Middle East hubs, including Dubai and the Red Sea Corridor, play a central role in global logistics and recent increases in shipping rates already reflect the disruption caused by the conflict.

Most exposed, least exposed

For the economies of emerging markets and Asia, the disruption to Middle East oil and gas supply will be impactful in different ways. Oil producing or energy sufficient countries can benefit while net importers face pressure through higher inflation, weaker currencies and slower growth. India is among the most dependent on oil and gas from Gulf states and its energy costs feed directly into its inflation basket and currency dynamics. China, by contrast, has a more diversified energy supply and bigger reserves than India. While the impact of higher oil prices will be felt by Chinese consumers, higher energy costs can also be passed on through industries to China’s exports.

Looking ahead and beyond the Iran war, our base case assumes a less favorable near term backdrop for parts of the Middle East. If the regime remains unchanged in Iran, tensions with Israel and the U.S. will likely remain and an elevated risk premia will continue to persist. The outlook for United Arab Emirates (UAE) and the development of Saudi Arabia as a tourism center and a transportation crossover location may diminish in the short term. More generally, we expect the global economy to absorb higher energy prices with relatively limited impact—potentially reducing growth by zero to half a percentage point—and for markets to return to a more constructive, risk on environment.

The portfolio standpoint

Our exposure to the Middle East is relatively limited, mainly focused on high quality companies. We have been cautious on Saudi Arabia due to valuation concerns rather than geopolitical forecasts. When hostilities initially escalated, our portfolio activity was restrained. Market volatility in some cases was driven more by global de-grossing and crowded positioning, for example, in semiconductors and some artificial intelligence (AI) linked areas. We attribute South Korea’s sharp decline and recovery during the conflict to rapid shifts in overseas investor positioning following a pre-war period of significant outperformance.

At the country level, we believe the conflict highlights the need to avoid assumptions that impacts will be similar for certain economies. Just as domestically-focused economies will manage higher energy prices and shortages differently, so will export-oriented countries. For example, we believe South Korea and Japan offer more resilience than Taiwan because of the diversity of their economies. In Latin America, the dynamics are also different. Brazil, in our view, stands out as relatively resilient. Domestic factors such as high real interest rates and the prospect of a meaningful rate cutting cycle offer support while oil production reduces sensitivity to energy driven inflation.

Investment discipline and structural drivers

Our investment approach and portfolio frameworks are underpinned by earnings and valuation discipline and country market awareness. Companies that benefit from the current environment may see upward earnings revisions, while those closer to the conflict may trade on lower multiples. For dividend oriented strategies, higher yielding stocks provide an embedded cushion against volatility. For growth stocks, on the other hand, selectivity is critical: we favor companies with tangible earnings momentum rather than those lifted primarily by thematic enthusiasm.

In 2025, emerging markets outperformed the U.S. and other developed markets supported by structural drivers including: AI and innovation; supply chain reconfiguration; China’s gradual economic recovery; improving corporate governance; and re industrialization, as nation states prioritize sustainable economic growth. We believe these drivers are still intact. The Middle East crisis may dampen the performance of some markets in the asset class but the buildout of AI infrastructure and improvements in corporate governance will continue.

It is also important to take a broader perspective. Emerging markets and Asia have a long history of navigating political and economic shocks and their institutions, central banks and infrastructure have also improved in resilience over time. Should the Iran conflict persist into the coming weeks and months, the asset class may face short-term volatility, but it does not change our investment thesis that emerging markets and Asia are at the beginning of a period of outperformance supported by a strong recovery in earnings growth.