The war in the Middle East has sent oil prices surging and reignited volatility across global financial markets, pressuring emerging markets just as the asset class was staging its strongest run in years.
Emerging markets outperformed developed markets in 2025 for the first time since 2017, with the MSCI Emerging Markets index climbing 34%. Since the war, however, the momentum has turned back in favor of developed markets as investors seek safety.
Yet emerging markets still trade at roughly a 40% discount to developed markets on a forward price-to-earnings basis, according to MSCI—a gap that reflects years of investor preference for U.S. assets during the dollar’s rise. And while the Iran war has scrambled the investing outlook, portfolio managers at Vanguard, VanEck and BlackRock say higher prices of crude oil and other commodities reinforce a case for certain emerging markets that they were making before the outbreak of hostilities.
They say better economic fundamentals and falling interest rates are beginning to favor emerging markets and challenge a decadelong preference for U.S. assets.
Indeed, inflation has fallen to or below historic norms across much of the developing world, pushing real interest rates to historically high levels in many emerging economies even as central banks begin cutting rates.
“We’ve already started to see the process of rates coming down, and that is beginning to feed into economic acceleration,” says Emily Fletcher, a portfolio manager at BlackRock Frontiers Investment Trust. “In many countries we are still at the early stages of that cycle.”
Another point in favor of emerging markets: Developed economies now carry public debt loads that routinely exceed 100% of gross domestic product, a gap that widened during the Covid era as many developed economies provided fiscal stimulus while many emerging markets tightened fiscal policy.
To be sure, emerging markets remain sensitive to shifts in investor sentiment or economic conditions, particularly if the Iran war drags on. A renewed surge in the dollar, a global recession or a deterioration in geopolitical conditions could quickly reverse recent gains.
Still, for portfolios that are light on international stocks, some portfolio managers say the question is no longer whether to look at emerging markets, but how quickly to reallocate as the U.S. dollar begins to weaken.
Here are some stock and bond markets where pros see opportunities:
Latin America
Latin American markets remain underrepresented in global portfolios, accounting for just 0.1% of the MSCI All Country World Index.
Across the region, interest-rate cutting cycles are under way. Fletcher highlights Brazil, Mexico, Peru and Chile as markets where high real rates and early-stage rate cuts could support growth.
Brazil stands out to Fletcher. The stock market has rallied roughly 74% from its 2024 lows, according to Fletcher, yet valuations remain below long-term averages and at a discount to developed markets.
What’s more, she says, Brazil’s exposure to commodities as an exporter of iron ore, oil and agricultural goods provides a tailwind if resource prices remain firm.
Eric Fine, a portfolio manager at VanEck, likes Colombia. Its market has lagged behind some regional peers and stock valuations have been depressed by political uncertainty surrounding a presidential election later this spring. Fine also notes that Colombia can benefit from higher commodity prices.
“It’s an oil exporter, valuations are depressed, and the market is starting to recognize that fundamentals may be stronger than sentiment suggests,” he says, pointing to the energy sector as central to the investment case.
Europe, the Mideast and Africa
In the emerging markets of Europe, the Middle East and Africa—or EMEA—Turkey has emerged as a favorite of portfolio managers despite a history of policy volatility. Years of politically driven interest-rate cuts drove the inflation rate above 80% in 2022, before a return to conventional monetary policy in 2023 helped support the currency and moderate inflation rates.
Dan Shaykevich, co-head of emerging markets and sovereign debt at Vanguard, points to low debt levels and strong economic growth as underappreciated strengths in Turkey. He favors dollar-denominated corporate and government debt, which he says remains relatively insulated despite risks from higher energy costs and a still-hot domestic economy.
Fletcher says the wild card is inflation. A continued moderation in inflation is critical to supporting stock valuations, while a prolonged rise in oil prices could complicate that path.
Across the region, fixed-income opportunities extend beyond Turkey. Shaykevich points to local-currency bonds in some Central and Eastern European economies, where yields remain elevated and fundamentals are improving.
Frontier markets
Some of the markets best positioned to benefit from the economic cycle are in less-followed markets. Fletcher highlights Pakistan, Kenya and Egypt as economies where inflation has fallen sharply, real interest rates remain high and central banks have room to cut rates. As rate cutting feeds through to the economy, she expects these markets to move into an expansion phase over the next two years.
Shaykevich also highlights what he calls “sleeper stories”—local-currency bonds issued in smaller markets such as Morocco, Paraguay and Guatemala that attract limited investor attention but offer stable balance sheets.
Local-currency debt offers both yield and diversification away from the dollar, while dollar-denominated emerging-market bonds provide a different risk profile than U.S. Treasurys and other developed-market bonds. When U.S. interest rates move in one direction, the yield on emerging-market bonds tends to move in the other, helping to buffer volatility.
Shaykevich describes the local-currency debt as unusually attractive right now, with roughly double the returns of a comparable U.S. bond index for about 25% more volatility, based on Vanguard analysis.
Ultimately, the prescription from all three managers is similar: Be selective, focus on countries with improving fundamentals and stay mindful of currency risk as well as the risk of a long war in Iran.
Tanzeel Akhtar is a writer in London. She can be reached at reports@wsj.com.