The repercussions of the war in the Middle East are reaching the heart of emerging markets, where its effects are beginning to extend beyond the energy and shipping sectors to directly impact asset valuations and corporate profit forecasts. In this context, Goldman Sachs has reduced its profit growth forecast for the MSCI Emerging Markets Index for 2026 by two percentage points to 23%, reflecting the widening impact of the conflict on investor appetite and risk assessments in these markets.
The American bank's estimates also showed a reduction in near-term targets for the benchmark index, with its forecasts for 3 and 6 months lowered to 1520 and 1580 points respectively, compared to 1570 and 1600 points previously, while maintaining a 12-month target of 1680 points. The bank also projected that earnings per share for the index would be around $112 in 2026, a decrease of nearly 2% from its previous estimates, indicating that a $30 per barrel increase in oil prices could cut between 3% and 4% from the index's profits.
Details of the Event
The downward revision of forecasts goes beyond technical adjustments, reflecting a comprehensive reassessment of the investment environment in emerging markets, driven by rising energy costs, supply disruptions, escalating inflation, and tightening monetary policy. Additionally, risk premiums associated with vital shipping routes, particularly the Strait of Hormuz, have increased.
Corporate profits in emerging markets are under simultaneous pressure through multiple channels, as the impact of rising oil prices extends beyond direct energy costs to include transportation, manufacturing, raw material inputs, insurance, and shipping costs, thereby squeezing profit margins. This is especially true for companies struggling to pass these increases onto the end consumer. At the same time, the inflation resulting from this wave erodes purchasing power and reduces demand, negatively impacting sales, particularly in non-essential consumer sectors.
Background & Context
Despite lowering its near- and medium-term forecasts, Goldman Sachs maintains a "positive" outlook on emerging market stocks in the long term. The bank does not believe that the investment fundamentals in these markets have disappeared, but it sees the near horizon as fraught with challenges, given the difficulty in estimating the extent of damage to energy infrastructure and the ongoing uncertainty regarding shipping disruptions through the Strait of Hormuz.
This approach indicates that major financial institutions are beginning to differentiate between emerging markets with a relative capacity to absorb shocks and those that are more vulnerable due to high reliance on energy imports, significant exposure to regional trade, or limited monetary and fiscal flexibility.
Impact & Consequences
In this context, Goldman Sachs estimates that the Middle East and North Africa region will top the list of profit declines, followed by India, while North Asia is expected to maintain relatively resilient performance, supported by the significant weight of technology and artificial intelligence sectors in markets like South Korea and Taiwan.
Financial markets analyst Mohamed Mamdouh Al-Nuwaila believes that the downward revision of growth expectations in emerging markets is not limited to Goldman Sachs's estimates but reflects a broader trend among global financial institutions in light of recent changes. He points out that the decisive factor is not only related to geopolitical war and rising oil prices but extends to the implications of these factors on the policies of major central banks.
Regional Significance
Estimates indicate that the Middle East and North Africa region will bear the brunt of the economic pressures due to its strategic location as a link between East and West. Additionally, major Asian economies, such as India, South Korea, Taiwan, and China, will also be affected due to their reliance on oil imports from the region.
As tensions continue, it is expected that this will prompt investors to reassess their exposure to the region, potentially leading to a gradual exit of investments from local stocks and bonds towards safer havens. Furthermore, rising shipping and insurance costs will contribute to increased risk premiums and reduce the attractiveness of investment in the region.
In conclusion, the repercussions of the crisis remain ongoing, as data indicates outflows from emerging market debt funds, reflecting a state of anticipation and caution among investors given the current conditions.