Emerging Market Equities Underperform as Oil Surges Past $90, AI Offers Only Buffer
Emerging market equities have underperformed since the Middle East conflict began, as oil prices above $90 per barrel widen valuation discounts versus U.S. stocks. Investment by U.S. hyperscalers in artificial intelligence drove the biggest EM returns and earnings upgrades over 15 months, providing the only buffer against further losses.
1. Energy Shocks Weigh on Emerging Markets
Emerging market equities reversed recent gains as the Middle East conflict intensified, driving oil prices above $90 per barrel. This supply-driven shock has heightened risk aversion and prompted institutional investors to shun consumer-linked EM stocks.
2. Valuation Headwinds Intensify
Heading into the conflict, EM trading discounts relative to U.S. equities were already below long-term averages, leaving limited upside. The lack of valuation support has exacerbated losses as pessimism grips the asset class.
3. AI Investment as a Critical Buffer
U.S. hyperscaler spending on artificial intelligence emerged as the single largest driver of EM returns and earnings upgrades over the past 15 months. Key tech-heavy Asian markets may hold up if this capex cycle remains immune to geopolitical tensions.
4. Conditions for a Rebound
A sustained recovery in EM sentiment will require stabilization of energy costs and clear continuity in global tech CAPEX. Without both, the current volatility could herald a prolonged recalibration of growth expectations in emerging markets.