Executive Summary
- Emerging Markets' (EM) earnings are entering their strongest multi-year upswing in a quarter century, driven by improved fundamentals and investor sentiment.
- Geopolitical risks have introduced near-term headwinds via higher energy prices, though the earnings momentum remains intact for now.
- As the fundamental re-rating of EM equities remains on track, investors with a multi-year horizon should find compelling value in the asset class.
For years, EM equities have faced criticism as an asset class. In 2025, however, a clear turning point emerged. MSCI EM equities rose 34%, comfortably outperforming the S&P 500’s 18% gain as EM share prices finally responded to a sharp improvement in fundamentals. Two tailwinds drove this acceleration. First, Artificial Intelligence (AI) related capital spending has lifted EM companies, especially in North Asia, as key suppliers to the global AI supply chain, with many already seeing earnings gains from “picks‑and‑shovels” exposure. Second, a benign commodity backdrop alongside China’s anti involution policies and firmer metals demand supported resource heavy markets such as Brazil and South Africa.
Consensus estimates now point to EM’s earnings per share (EPS) growth of 33% for 2026 and another 15% for 2027, building on solid 16% growth in 2025. See Fig 1. This would represent the strongest sustained earnings expansion in a quarter-century, unmatched except in recovery years following major shocks (e.g., 47% in 2021 post-COVID and 44% in 2010 after the Global Financial Crisis). The concern now is whether the higher energy prices arising from the US-Iran conflict could undermine this earnings momentum.
Fig 1: MSCI EM shows sustained earnings momentum
Source: Eastspring Investments, FactSet, Goldman Sachs, April 2026
Impact of Iran-US conflict
In a scenario of a prolonged conflict, with oil and gas prices remaining higher for longer, we should expect energy costs to feed through to broader inflation, triggering tighter monetary policies, and therefore, softer economic activity. Major energy importers, including India, Thailand, the Philippines, and Chile, face the most direct pressure. The United Arab Emirates and neighbouring countries, given geographic proximity, are also vulnerable to meaningful GDP impact. Net energy importers such as China, Korea, and Taiwan are likely to experience headwinds, though these could be mitigated by supportive fiscal policies and/or continued AI momentum.
Interestingly, while the oil passthrough to inflation in each Emerging Market varies considerably, the region does not appear to be in a worse situation compared to most other Developed Markets (DM). In fact, when looking at the past supply-side oil shocks, MSCI EM Index has performed in line or better than S&P 500 and Stoxx 600 on most occasions. See Fig 2.
Fig 2: Equity markets’ performance during supply-side oil shocks
Source: Bloomberg, UBS. Note: a) The 7 historical episodes are i) Iranian Revolution ii) Gulf War iii) OPEC Supply Constraints iv) Venezuelan Oil Strike v) Outages in Venezuela, Iraq and Nigeria vi) Arab Spring and vii) Russian invasion; b) Time weighted average excludes Iranian Revolution; c) Shanghai Composite Index data not available for Iranian Revolution and Gulf War.
This suggests EM equities continue to be a good candidate for investors seeking diversification away from US equities. Most likely due to significant uncertainty, earnings forecasts remain unchanged for now, though a downward revision is likely in the coming quarters.
Fig 3: Earnings growth across EMs
Source: Eastspring Investments, IBES, J.P. Morgan, March 2026
The long-term case for EM equities remains intact
More than a month into the conflict, the outcome remains uncertain. While it is still too early to quantify the impact on EM, consensus expectations appear to be pricing in a relatively swift resolution, warranting some caution. Nonetheless, taking a longer-term perspective, the structural drivers supporting EM equities are unchanged and, in some cases, strengthened:
- Corporate governance reforms are gaining traction across key markets. This is a gradual process that should not be impacted by geopolitics. Over time, improved capital allocation should help narrow the gap between GDP and EPS growth. The US dollar moves in long cycles and trade-weighted USD appreciation trend in the last 15 years might have ended in 2025. While a knee-jerk reaction to war is usually USD appreciation, the structural factors driving a weaker greenback are not likely to change.
- Capex cycles historically favour EM equities. Increased global tensions might accelerate capex in AI, defense budgets, energy transition, and re-arrangement of supply chains.
- In the past few years, Developed Market companies have benefited from asset-light structures and new business models with powerful network effects. As AI reshapes several industries, potentially disrupting moats, returns might be under pressure.
Fig 4: Returns on equity – MSCI EM relative to SPX Index
Source: Bloomberg, Eastspring Investments as of 20 April 2026
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