At a Glance: Emerging Markets: positioning for an oil shock world

Emerging markets are entering a fundamentally different macro regime, one defined not by cyclical growth differentials or monetary divergence, but by energy security, supply chain fragility, and commodity scarcity.

The potential disruption to oil and gas flows through the Strait of Hormuz is not just another geopolitical risk. It is a systemic supply shock with the capacity to reshape relative performance across EMs, redraw capital flows, and widen the dispersion between winners and losers.

Our core message to investors is clear:

This is a regime shift. In this environment, commodity intensity, energy self-sufficiency, and logistical resilience matter more than traditional EM growth narratives. Asset allocation within EM now matters more than allocation to EM.

1. From synchronized EM beta to structural divergence

Q1 reinforced a pattern that is likely to define the next phase:

• Early-quarter strength gave way to sharp reversals across India, the Middle East, and Latin America
• Commodity-linked markets outperformed, led by Brazil
• China lagged at the index level, but selective exposure, particularly outside consumer tech, remains compelling
• Semiconductors provided an unexpected offset, highlighting the importance of granular positioning over broad regional bets

This is no longer a market where “EM” behaves as a single asset class. Instead, we are seeing a fragmentation into distinct macro buckets:

• Energy importers – structurally vulnerable
• Energy exporters (non-GCC) – structurally advantaged
• GCC exporters – strong fundamentals but high geopolitical risk
• China – a hybrid case with unique buffers

2.   The oil “air pocket”: why this shock is different

At the center of our outlook is what we describe as an “air bubble” in global oil supply.

This is not simply about prices reacting to headlines. It is about physical constraints in the system:

• ~20 million barrels/day typically flow through the Strait of Hormuz¹

• Disruptions create a lagged but severe supply shortfall, due to ~50-day shipping cycles²
• Alternative infrastructure (Saudi and UAE pipelines) is insufficient to offset lost flows
• LNG markets are even more constrained due to risk-sensitive shipping dynamics

The result is a temporal mismatch between demand and deliverable supply, a dynamic markets historically underestimate.

Critically, price signals may lag reality:

• Futures curves remain anchored (~$70–80)³
• Physical markets could clear far higher, particularly as Asia and Europe compete for constrained barrels

3.   Second-order effects: the real transmission mechanism

The most underappreciated aspect of this shock is not oil itself, but its industrial and agricultural spillovers:

• Fertilizers: Nitrogen and ammonium nitrate supply disruptions threaten global agriculture and mining
• Mining inputs: Sulfur shortages impact copper production via leaching processes
• Plastics: Supply chain fragility means a single missing input can halt entire manufacturing ecosystems

4.   Latin America: the clearest beneficiary

Against this backdrop, Latin America stands out as the most structurally advantaged region in EM.

Why?

• Strong historical linkage between commodity prices and equity performance
• A multi-year valuation disconnect: commodities rallied post-2020, but LATAM equities and currencies lagged
• Improving macro fundamentals, particularly in Brazil

Brazil: a core conviction

Brazil remains our highest-conviction overweight, supported by:

• Positive terms of trade shock
• Strong and orthodox monetary policy
• A structurally improved trade balance
• Net energy exporter status (producing ~4.5 mb/d vs. ~3.3 mb/d consumption)

Importantly, the Brazilian real remains undervalued in real effective terms, suggesting additional upside as commodity strength feeds through.

5.   Rethinking China: from growth story to resilience play

China presents a more nuanced opportunity.

While traditionally viewed as vulnerable due to energy imports, several structural factors differentiate it in this cycle:

• Lower marginal demand sensitivity due to already weak domestic demand

• Rapid electrification and decarbonization, reducing oil intensity

• Significant strategic reserves (~1.2–1.4bn barrels)
• Access to alternative supply chains, including Russian crude

Our positioning reflects this shift:

We are increasing exposure to China, but through energy, renewables, and industrial enablers rather than consumer tech.

This includes companies linked to:

• Battery supply chains
• Renewable infrastructure
• Domestic energy security

6.   India and energy-importing Asia: structural headwinds

In contrast, energy-importing Asia faces a potentially more challenging outlook. 

India is the clearest example:

• High dependence on imported energy
• Sensitivity to currency weakness
• Limited short-term offsets to rising input costs

We have therefore moved to a maximum underweight in India, while remaining selective in areas that benefit from currency dynamics (e.g., IT services).

More broadly, the region faces:

• Margin compression
• Demand destruction
• Increased macro volatility

7.   Portfolio positioning: aligning with the new regime

Our current positioning reflects a deliberate tilt toward commodity leverage and energy resilience:

• Overweights
  • Brazil (maximum)
  • Mexico
  • Indonesia
  • South Africa
  • China (selectively, in energy/renewables)
• Cautious:
  • India (maximum)
  • Cautious exposure on Korea and Taiwan with a focus on the semi-conductor sector.
  • Energy-importing Asia broadly
• Exclusions
  • No exposure to Turkey, Thailand, or the Philippines

Uncertainty around the duration of supply disruptions, geopolitical responses, and the broader commodity path leaves markets underestimating the real-world constraints of this shock, in our view, setting up a period of heightened volatility and pronounced dispersion across emerging markets, where performance will increasingly be determined not by broad beta, but by differentiated exposure to energy, commodities, and supply chain resilience at the country and sector level.

In our view, EM investing is shifting from beta exposure to active selection—where country, sector, and even logistics exposure will determine outcomes.

Emerging markets are no longer a homogeneous growth trade. They are a set of differentiated macro exposures, and in a world of constrained energy supply, the advantage is shifting decisively toward commodity producers and energy-resilient economies.

Source: ¹IEA, ²Financial Times, ³Bloomberg.

Professional investors only .

This is a marketing communication .

Issued and approved in the UK by J O Hambro Capital Management Limited (“JOHCML”) which is authorised and regulated by the Financial Conduct Authority. Registered office: Level 3, 1 St James’s Market, London SW1Y 4AH. Issued in the European Union by Perpetual Investment Services Europe Limited (“PISEL”) which is authorised by the Central Bank of Ireland. Registered office: 24 Fitzwilliam Place, Dublin 2, Ireland D02 T296. Issued in the United States by JOHCM (USA) Inc. (“JOHCMU”). Principal office: One Congress Street, Suite 3101, Boston, Massachusetts 02114. Issued in Singapore by JOHCM (Singapore) Pte Limited (“JOHCMS”) which is regulated by the Monetary Authority of Singapore. Registered office: 138 Market Street, #15 04 CapitaGreen, Singapore 048946. References to “JOHCM” below are to JOHCML, JOHCMU, JOHCMS or PISEL as the context requires. Perpetual Group is a trading name of JOHCML and PISEL . 

RISK CONSIDERATIONS: The strategy invests in international and emerging markets. International investments involve special risks, including currency fluctuation, lower liquidity, different accounting methods and economic and political systems, and higher transaction costs. These risks typically are greater in emerging markets. Such risks include new and rapidly changing political and economic structures, which may cause instability; underdeveloped securities markets; and higher likelihood of high levels of inflation, deflation or currency devaluations .

The views expressed are those of the portfolio manager as the date of posting, are subject to change, and may differ from the views of other portfolio managers or the firm as a whole. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. 

The distribution of this document in jurisdictions other than those referred to above may be restricted by law (“Restricted Jurisdictions”). Therefore, this document is not intended for distribution in any Restricted Jurisdiction and should not be passed on or copied to any person in such a jurisdiction .

Past performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested .

Investing in companies in emerging markets involves higher risk than investing in established economies or securities markets. Emerging markets may have less stable legal and political systems, which could affect the safe-keeping or value of assets .

Investments may include shares in small-cap companies and these tend to be traded less frequently and in lower volumes than larger companies making them potentially less liquid and more volatile .

The information contained herein including any expression of opinion is for information purposes only and is given on the understanding that it is not a recommendation .

The information in this document does not constitute, or form part of, any offer to sell or issue, or any solicitation of an offer to purchase or subscribe for any funds or strategies described in this document; nor shall this document, or any part of it, or the fact of its distribution form the basis of, or be relied on, in connection with any contract .

Telephone calls to and from JOHCM may be recorded. Information on how personal data is handled can be found in the JOHCM Privacy Statement on its website: www.johcm.com

J O Hambro® and JOHCM® are registered trademarks of JOHCML.