AI Theme Shields Emerging Markets as Oil Tops $90 and Discounts Narrow
A strategy report warns emerging market equities have been among the worst performing asset classes since the Middle East conflict began, with oil prices climbing above $90 per barrel and EM trading discounts narrowing below long-term averages. The AI theme has been the single largest driver of EM returns and earnings upgrades over the past 15 months, offering a potential buffer for tech-heavy Asian markets.
1. EM Equities Face Sharp Reversal
Emerging market equities have experienced a sharp reversal of recent gains as the Middle East conflict enters its third week, prompting a decisive shift into risk-off mode and making EM one of the worst performing asset classes globally.
2. Energy Costs and Valuation Pressures
With oil prices climbing above $90 per barrel, EM regions vulnerable to supply-driven energy shocks face heightened pressure, compounded by trading discounts relative to U.S. equities that sit well below long-term averages, leaving little room for error.
3. AI Theme as Performance Buffer
Over the last 15 months, the Artificial Intelligence theme has driven the largest share of EM returns and earnings upgrades, driven largely by continued high-investment phases from U.S. hyperscalers that support tech-heavy Asian markets.
4. Outlook for EM Markets
A sustained EM recovery hinges on both stabilization in energy costs and a clear signal that the global tech CAPEX cycle remains uninterrupted by geopolitical instability, or the current volatility could evolve into a longer-term recalibration of growth expectations.