Conflict in Middle East adds new concern for EM investors

investmentnews.com:

The outbreak of conflict in the Middle East is adding to a long list of concerns that has investors dumping developing-nation assets for the safety of the dollar. 

The surprise weekend attack on Israel sent Middle Eastern stocks plunging and rippled across crowded currency trades. Equity gauges in Dubai and Istanbul dropped at least 2.6%, while crude oil rose more than 3%. The Mexican peso, one of the more liquid emerging-market currencies, fell as much as 1.4% before rebounding as risk sentiment improved across global markets. 

Investors were ditching emerging-markets even before the conflict broke out. Stocks have already wiped out year-to-date gains, and fewer and fewer currencies are holding up against the greenback. 

The unwinding of what some saw as the decade of emerging markets has had no shortage of drivers. Indications global interest rates will stay higher for longer and rising oil prices have put a cap on how much developing nations can ease policy to boost their economies, while disappointing Chinese data has dented expectations for improving global growth. 

And then there is the historic move in the US Treasury markets, which kicked the rout into high gear. Exchange-traded funds that buy developing-nation stocks and bonds have seen five straight weeks of outflows, with $3.12 billion being pulled last week alone — the most in a year. Credit default swaps that protect bondholders against default by a major emerging market in the next five years jumped for a fifth successive week, the longest streak since May 2022.

“The Israeli war is what seems so far as a mini-shock to the markets, which have otherwise been driven by ‘higher-for-longer’ story alone,” said Sergey Goncharov, a money manager at Vontobel Asset