Traditional strategies of selling emerging market assets during periods of market stress are no longer a foolproof defensive play, as evidenced by the ongoing Middle East crisis that has persisted for over two months.
Historically viewed as among the riskiest assets, emerging markets have surprisingly performed well during the Iran conflict. Year-to-date, emerging market equities have gained over 20%, more than triple the rise of the S&P 500. Emerging market currencies are near historic highs, and the premium of their bonds over those of developed markets has remained stable.
Investors from BlackRock, PGIM, Danske Bank, and Robeco indicate this is part of a broader trend, pointing to a fundamental shift in the asset class: governments are bolstering foreign exchange reserves, while increasingly sound institutions and policymaking help absorb market shocks.
Concurrently, policy shifts driven by the Trump administration and pressures on the Federal Reserve have shaken investor confidence in the safety of U.S. assets, prompting a search for alternative investments.
"The resilience of emerging markets far exceeds what traditional market perceptions suggest," said Soeren Moerch, a fund manager at Danske Bank.
Of course, gains are not uniformly distributed, with some countries facing particularly significant risks. Moerch has been purchasing bonds from energy-importing nations like Pakistan and Kenya in recent weeks, following a severe hit to such bonds from rising fuel prices. Simultaneously, he is betting that the oil-driven rally in bonds from Angola and Nigeria may be overextended.
The overall advance is largely attributed to demand for Asian semiconductor stocks, which have benefited from the investment boom in artificial intelligence. However, it is not solely due to the tech sector's 68% surge. The energy sector has risen 14%, and utilities have also gained 12%.
Cathy Hepworth, Head of Emerging Market Debt at PGIM Fixed Income, noted that the investor base is broadening.
"It's no longer just investors dedicated to emerging markets. A wider array of buyers is entering, focusing on spreads and interest rates, often seeking foreign exchange exposure. The market structure has changed," she stated.
**Strong Ratings**
At a time when investors lament the unpredictability of U.S. policy, the absence of sovereign defaults and currency shocks in major emerging markets has helped enhance the appeal of their assets. Data compiled by Bloomberg shows that emerging market governments and corporations have raised $329 billion via Eurobond issuance year-to-date, a 19% increase compared to the same period in 2025.
Michel Aubenas, Head of Emerging Market Debt at BlackRock, highlighted the steady improvement in sovereign credit quality. Moody's has indicated that major emerging market sovereigns have demonstrated greater resilience to global shocks since 2020.
"We anticipate this year will mark the fourth consecutive year of net positive rating actions, with more upgrades than downgrades," Aubenas said.
Even as the conflict threatens economic growth and accelerates inflation by causing energy prices to spike, some investors argue that emerging market companies will remain attractive due to their relatively low valuations and robust profitability.