Investing.com — Emerging market equities are grappling with a sharp reversal of recent gains as the conflict in the Middle East enters its third week, threatening the growth that has characterized the asset class over the last year. According to a new strategy report from UBS, have become one of the worst-performing asset classes globally since the start of hostilities, as the market shifts into a decisive “risk-off” mode.
The primary concern for the is the region’s vulnerability to supply-driven energy shocks. Analysts at UBS point out that Asia, in particular, remains a massive net consumer of Middle Eastern fossil fuels.
“In normal course, an extended period of conflict could be challenging for ,” the analysts noted, pointing to a historical trend where suffer significantly during episodes where climb above the $90 per barrel mark.
A lack of valuation support is adding to the pressure. Heading into the conflict, were not particularly “cheap,” with their trading discount relative to U.S. equities sitting well below long-term averages. The market had already priced in a high degree of optimism, leaving little room for error as geopolitical risks escalated.
” response can be summarized as a reversal of most trades that worked in the preceding three months,” the report stated, suggesting that the “sell the oil consumers” narrative is beginning to take hold as institutional investors flee to safer havens.
AI investment: The lone buffer?
UBS highlights one critical factor that could prevent a total collapse in despite the darkening macro picture: the Artificial Intelligence trade. Over the last 15 months, the AI theme has been the single largest driver of EM returns and earnings upgrades.
The report suggests that the high investment phase of U.S. “hyperscalers” remains immune to the conflict; hence, key tech-heavy emerging markets in Asia may find a floor.
“Future EM outperformance could continue if the AI drivers remain immune to the conflict and any further concerns,” the analysts argued. However, they cautioned that a quick resolution is necessary to see the earlier momentum return. Without it, the “short-term excursion” into volatility may turn into a long-term recalibration of growth expectations.
The market will need to see both a stabilization in energy costs and a clear indication that the global tech CAPEX cycle remains uninterrupted by the geopolitical instability in the Middle East, for the EM story to regain its footing.