Emerging market equity funds have experienced significant declines this month, emerging as some of the worst-performing asset classes as investors reduce their exposure to risk amid escalating conflict in Iran. According to LSEG Lipper calculations, equity funds focused on Pakistan, Chile, Greece, Colombia, Argentina, the United Arab Emirates and Saudi Arabia have been among the biggest decliners over the past month, across the 518 categories tracked by Lipper.
The recent pullback follows strong gains in emerging markets earlier in the year, gains driven by relatively cheaper valuations, solid growth prospects and a weakening US dollar. The MSCI’s emerging markets equities index has fallen more than 6% this week, in contrast to a 2.2% decline in the MSCI World Index and a 0.7% drop in the MSCI United States.
Weekly data tracking around 13,000 emerging market equity funds indicates inflows are slowing, reaching $5.8 billion this week, the lowest level in seven weeks. While Goldman Sachs anticipates a limited earnings impact due to a resilient sector mix if the disruption proves short-lived, it maintains its forecast for 25% growth in MSCI EM earnings per share in 2026.
Goldman Sachs noted, “However, higher starting valuations following strong gains last year leave EM equity markets vulnerable to near-term correction risks.” The current market volatility underscores the sensitivity of emerging markets to geopolitical events and shifting investor sentiment.
