Geopolitics: Impacts and Opportunities for Emerging Markets

The military conflict between the United States and Iran has not only heightened geopolitical tensions but also reframed the conversation around market concentration, a concern that has become particularly pronounced in the context of emerging markets. Investors, seeking substantial returns and diversification away from the concentrated U.S. market, have flocked to emerging markets in recent years. However, the disproportionate dependence on a limited number of stocks, particularly in technology—often tied to the AI boom—has exposed the vulnerabilities inherent in this strategy. This intersection of geopolitical volatility and market concentration raises crucial questions: Are investors unwittingly compounding their risks by venturing into these regions?

The iShares MSCI Emerging Markets ETF (EEM) has seen significant growth, including a 29% surge in 2025, but this performance must be viewed against the backdrop of a still-volatile landscape. Despite its historical gains, the ETF yielded little return in the current year, reflecting the pronounced uncertainty stemming from ongoing geopolitical events. Notably, over 75% of the EEM index is weighed down by countries in Asia, principally China, South Korea, India, and Taiwan. With substantial holdings in tech giants such as Taiwan Semiconductor and Samsung, these nations possess inherent concentration risks, especially as the technology sector constitutes over 30% of the index. Malcolm Dorson, Senior Portfolio Manager for Emerging Markets, astutely points out that this concentration is perilous; one significant disruption could ripple through the entire index.

This week, South Korean stocks have epitomized volatility: experiencing the worst single-day trading performance since 2008, then rebounding spectacularly. Such fluctuations are indicative of broader market tensions exacerbated by fears surrounding energy supplies in Asia due to the implications of the Middle Eastern conflict. The surge in Brent crude oil prices past $90 only complicates matters further, with China's subsequent export ban on fuels posing additional supply constraints. As many investors find themselves lured by the recent strong performance of stocks like SK Hynix and Samsung (with astounding gains of 274% and 125%, respectively, last year), they may risk becoming complacent about the chained correlations of energy prices and technological performance.

Nonetheless, experts urge caution against a wholesale exit from emerging markets. Macroeconomic signals suggest that these regions may still offer attractive returns, particularly for long-term investors. Dorson advocates for a diversified approach that includes varying types of emerging markets to mitigate risks, pointing to Latin America as a counterbalance. Countries such as Argentina, Brazil, and Colombia—often directly influenced by energy and commodity prices—may provide lucrative investment opportunities as part of a broader strategy amidst the fluctuating dynamics of the global market. Given their markedly lower price-to-earnings ratios compared to U.S. companies, these Latin American markets could provide compelling valuations for discerning investors.