Many developing economies entered 2022 contending with high inflation, slowing growth and stretched public finances because of the pandemic, says The Economist. Then Russia invaded Ukraine. Now they can add soaring commodity prices into the mix: “Large importers of wheat and sunflower oil across north Africa and the Middle East, most notably Egypt” could be heading for hunger and civil unrest.
The war may also prompt companies and investors to take a more cautious approach to overseas investing in future for fear of further geopolitical upsets. That would mean less investment in emerging markets (EMs) – which are perceived as riskier – and steeper capital costs for local businesses.
High risk, low growth
“The start of the war sparked a sell-off across many EM financial markets,” says William Jackson of Capital Economics. This reflects “financial contagion” as investors turn towards safe haven assets. But EMs had been struggling before the invasion, with the MSCI Emerging Markets index falling more than 10% in the year to the end of February, even as the developed market equivalent gained more than 10%. That’s partly due to a regulatory crackdown in China, which accounts for almost one-third of the index.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Tighter US monetary policy is another headwind, says Jonathan Wheatley in the Financial Times. Higher interest rates on dollar assets tend to cause investors to pull cash from emerging market stocks and bonds. It also usually boosts the dollar, and a stronger greenback makes it more expensive for companies in emerging economies to raise and service dollar-denominated debt.
Emerging economies have less reliable legal and economic institutions than developed ones. Investors accept that when growth prospects are strong, but “the difference between the pace of growth in developing and advanced economies is set to narrow to its lowest level this century”. As David Lubin of Citi bank puts it, “without growth, it’s just [all] risk”.
Nevertheless, emerging markets look well-positioned, says Reshma Kapadia in Barron’s. Most have lower reliance on foreign borrowing and higher foreign exchange reserves than during previous periods of US monetary tightening. India’s foreign exchange reserves have more than doubled over the past decade. MSCI EM company profits “are expected to grow by 10.2% in 2022”, faster than the 8.9% predicted for US stocks.
That growth comes much cheaper too, with the index trading on 12 times 12-month forward earnings, compared with 19 in the US, “the widest valuation gap in nearly 20 years”. Brazil and Indonesia, which both stand to gain from the commodities boom, look intriguing bets.
-
The most influential people of 2025Here are the most influential people of 2025, from New York's mayor-elect Zohran Mamdani to Japan’s Iron Lady Sanae Takaichi
-
Millions of parents are missing out on up to £720 a year in extra pension cash – are you affected?A mum who narrowly missed out on the pension boost said she “never knew the government rule existed” and wants other parents to use it
-
8 of the best properties for sale with indoor gymsThe best properties for sale with indoor gyms – from a four-storey mews house in London’s Knightsbridge, to a 1920s Arts & Crafts house in Melbury Abbas, Dorset
-
Top stock ideas for 2026 that offer solidity and growthLast year’s stock ideas from MoneyWeek’s columnist and trader, Michael Taylor, produced another strong performance. This year’s stocks look promising too
-
Market predictions for 2026: Will Dubai introduce an income tax?Opinion My 2026 predictions, from a supermarket merger to Dubai introducing an income tax and Britain’s journey back to the 1970s
-
Stock markets have a mountain to climb: opt for resilience, growth and valueOpinion Julian Wheeler, partner and US equity specialist, Shard Capital, highlights three US stocks where he would put his money
-
The steady rise of stablecoinsInnovations in cryptocurrency have created stablecoins, a new form of money. Trump is an enthusiastic supporter, but its benefits are not yet clear
-
SRT Marine Systems: A leader in marine technologySRT Marine Systems is thriving and has a bulging order book, says Dr Michael Tubbs
-
Goodwin: A superlative British manufacturer to buy nowVeteran engineering group Goodwin has created a new profit engine. But following its tremendous run, can investors still afford the shares?
-
A change in leadership: Is US stock market exceptionalism over?US stocks trailed the rest of the world in 2025. Is this a sign that a long-overdue shift is underway?
