Almost a year after the ‘Liberation Day’ tariff rollout, the conflict in the Middle East has delivered a fresh shock to economies. While investors may be concerned about its impact on emerging markets, there are companies and sectors in these regions where long-term fundamentals continue to look promising.
Key takeaways
- Geopolitical shocks are driving volatility across emerging markets, with higher oil prices, freight disruption, and shifting trade policies weighing on corporate profitability.
- Despite headwinds, analysts still see pockets of strength, from China’s tech and biopharma industries to India’s steel sector, or Korean companies benefitting from governance reforms.
- Improved fiscal discipline is creating advantageous conditions in specific markets.
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We publish this year’s Analyst Survey at an especially volatile moment for emerging markets (EM). Previously prevailing themes, such as a weaker outlook for the US dollar or the potential easing of monetary policy, have been brought into question in the wake of the conflict in the Middle East. In their place are higher oil prices, inflation worries, and renewed concerns about the logistics of global trade.
Geopolitical shocks
Over half of our China analysts (54 per cent) say geopolitics or monetary factors will have a moderately or significantly negative impact on corporate profitability over the next 12 months. That compares with 43 per cent in EMEA/Latin America, 35 per cent in Asia ex China/ex Japan, and the global average of 38 per cent.
“Even if the conflict ends tomorrow, freight rates will not return to normal immediately,” says Amara Xia, an equities analyst covering China marine transportation. “Port congestion, the time needed to reposition vessels, and the surge in demand to rebuild depleted inventories will all keep rates elevated for a while before they eventually normalise.”
James Trafford, an EM portfolio manager and energy analyst, adds: “If there is a fast resolution to the conflict then oil should be able to move quickly again, so long as there has not been any material damage to the upstream producing fields. The high-quality nature of the Middle East reservoirs means that those which have been closed can restart promptly.”
“However, if disruption lasts beyond the end of March, or there are fresh attacks on infrastructure, then it will likely cause more substantial drawdowns of inventories keeping the market tighter for longer.”
Geopolitical shocks can cause acute market volatility while simultaneously casting persistent shadows. Following last year’s tariff shocks, for example, nearly two-thirds of Fidelity analysts in this year’s survey say they continue to factor the impact of shifting trade policies into their fundamental analysis.
Yet despite these headwinds, our survey finds that beyond the headlines there remains a diverse set of positive investment stories.
“Within Asia’s oil refining sector, the most likely beneficiaries of higher oil prices are non-government-owned, independent upstream producers,” says Eliza Tay, an equities analyst covering the sector.
She also points to a split emerging in downstream refining and petrochemicals, where companies with reliable raw‑material supply have the capacity to maintain stronger margins and raise operating rates.
China’s tech prowess
Chinese leaders have invested heavily in high-tech industries to boost the country’s self-reliance and resilience to volatile geopolitics. Those efforts have supported China’s rise in electric vehicles, artificial intelligence, biotech, and robotics. The economy is increasingly driven by innovation and policy that supports technology and science.
Despite US export controls on cutting-edge technology, “a growing number of chips used in China will be made locally,” says Allen Yang, an equities analyst covering China’s chipmaking industry.
“Local semiconductor equipment makers will continue to benefit from domestic capacity expansion and supply chain localisation for years to come.”
China’s pharmaceutical industry is rapidly shifting from being a ‘fast follower’ of innovative medicines to a challenger of US dominance in R&D (Research & Development), capturing a growing share of global drug licensing deals, according to Lizheng Zhu, an equities analyst covering China biotech.
“Chinese biopharma companies’ drug development is two or three times faster than US or EU counterparts, but at only half or a third of their costs,” says Zhu. “We will see more and more ‘first-to-market’ drugs coming from China in the next few years.”
China consumer
Though China’s technological development has stormed forward, the country still faces a series of economic challenges including a troubled housing sector, persistent deflation risks, and sluggish consumer demand. Signs of recovery are emerging among consumers, with strong demand for both premium and value-for-money products, according to Alex Dong, an equities analyst covering China consumer staples.
“The Chinese consumer market is evolving”
says Dong. “Despite the muted demand in the middle segment, we are seeing intriguing opportunities in the top and bottom end.”
Of China analysts, 31 per cent see their sector as ‘undervalued’, the highest across the world and compared with 24 per cent in Asia ex Japan/ex China, and 29 per cent in EMEA/Latin America. But their emerging market peers are more confident about stock performance in the coming 12 months: 57 per cent of EMEA/Latin America analysts and 50 per cent of Asia ex Japan/ex China analysts say their stocks will ‘significantly’ or ‘moderately’ outperform the regional benchmark, higher than the 46 per cent for China.
Korea’s corporate reforms
One of the big stock market winners last year was Seoul. For years, Korean companies have been criticised for hoarding cash on balance sheets and refusing to share profits with shareholders. But, following in the footsteps of Japan, the authorities have confronted the issue with structural reforms. The ‘Value-Up’ program, which aims to reduce the so-called ‘Korea discount’, has gained steam with a new president pushing for shareholder-friendly policies.
“Given the ongoing reform, I expect Korean financials to deliver better capital allocation and improving corporate governance versus their history,” says Charvi Pandey, an equities analyst covering Asian financials. The near term, however, looks more challenging.
“Korea is a net importer of oil,” Pandey adds. “An extended crisis in the Middle East could hit its economic growth. We will continue to monitor the impact on Korean financials, especially those which have direct lending or equity exposure to the region.”
Across Asia Pacific, 47 per cent of Asia ex Japan/ex China analysts expect dividend payments to increase over the coming 12 months, higher than the 39 per cent in China and 43 per cent in EMEA/Latin America.
Indian steel
A couple of other opportunities stand out in the survey. India’s steel industry has expanded rapidly over the past decade, benefitting from accelerated urbanisation and industrial growth. Deepak Kumar, an equities analyst covering Indian metals, says the sector will outperform on the back of a strong earnings outlook in the coming year after the country extended a tariff on steel imports for three years.
“With the customs duty and safeguard duty, India’s steelmakers now have as much as 20 per cent price advantage over regional steel players”
says Kumar. “The sector has seen a valuation rerating on increased earnings visibility. I expect the rerating to sustain.”
Because iron ore is domestically available in India, the only direct impact on the sector from disruptions in the Middle East is higher freight costs for imported coking coal, he says.
Greek banks is another interesting sector.
“Greece has been de-leveraging for some time and the ratio of private sector credit to GDP is low relative to European peers,” says Tim Eklund, an equities analyst who covers emerging market banks. The economy has been strengthening and loan growth picking up, he adds, pointing to the country’s return to investment grade just over two years ago, for the first time since the eurozone debt crisis.
Higher energy prices are, however, a concern. “Anything impacting the flow of tourism to Greece would have a negative impact on the country’s economy,” says Eklund.
No common outcome
The duration of the Middle East conflict arguably matters more for emerging markets than others. The longer it goes on, the more it could exacerbate inflationary pressures and negatively impact energy importers.
Some industries and geographies will prove more resilient than others, and emerging markets should not be viewed as a single, uniform bloc. They comprise diverse economies with distinct growth drivers, risk profiles, opportunity sets, monetary and fiscal considerations. Careful discrimination, patience, and a measured approach will be critical.
