Emerging Markets Spotlight – May 2026

Key Points

• The closure of the Strait of Hormuz is no longer a feared tail risk but an intensifying macroeconomic shock for Asia.
• Policy responses across Asia are becoming more defensive, with intervention and rate hiking now constraining growth rather than supporting confidence.
• Currency and bond markets are already pricing in the impact on growth, inflation, and external balances, while equity markets appear slower to fully reflect the risks.
• Against this backdrop, we continue to favour an underweight position in energy‑importing Asian markets.

Asia’s Energy Shock and Market Repricing

As we set out last month, the conflict centred on Iran represents an exceptional negative supply shock, with severe implications for some emerging markets. Since then, conditions have deteriorated further. The continued closure of the Strait of Hormuz has pushed oil prices back above USD 120 a barrel and extended the shock well beyond energy markets into currencies, rates and growth expectations across Asia.

The transmission mechanism we described previously is now clearly visible. Asia is highly reliant on Middle Eastern energy supply, the region faces a prolonged disruption that would effectively act as a drag on growth. Higher fuel and transport costs feed rapidly into headline inflation, weaken current accounts and place sustained pressure on currencies. Policymakers are increasingly forced to balance weakening growth against the need to contain inflation and preserve external stability amid an already challenging global monetary backdrop.

Currency and bond markets reacted first. Since the conflict escalated, the Indian rupee, Indonesian rupiah and Philippine peso have weakened. Options markets are now pricing meaningful probabilities of further depreciation over the next three months, signalling that investors see limited near‑term relief without clear de‑escalation. Simultaneously, bond markets point to tighter financial conditions despite slowing growth momentum.

Official responses underline the severity of the shock. The Reserve Bank of India has opened a dedicated dollar‑swap window for oil refiners, increased spot FX* (*FX is the global market where currencies are exchanged, enabling businesses, banks and investors to trade and determine exchange rates.) intervention and restricted offshore derivatives trading, while acknowledging that risks to growth are now skewed to the downside. Bank Indonesia has stepped up both onshore and offshore intervention, while tightening dollar‑buying regulations in an effort to contain capital outflows. The Philippine central bank has signalled a series of policy interest rate increases to contain inflation despite weakening activity, while Thailand has cut growth forecasts sharply as inflation expectations reset higher. Across the region, multilateral institutions have revised down growth forecasts and marked up inflation projections.

In our view, equity markets, remain behind this reality. Valuations in several Asian markets continue to assume relatively stable earnings growth, with limited adjustment for margin pressure from higher input costs, weaker domestic demand or tighter financial conditions. We believe that prolonged terms‑of‑trade shocks in energy‑importing economies typically feed into corporate profitability with a lag, particularly where currencies are adjusting and fiscal space is constrained.

We think that FX and bond markets are ahead of equities in pricing the effects of the Hormuz disruption. Against this backdrop, we remain significantly underweight India, hold zero exposure to the Philippines and Thailand, and remain underweight Korea and Taiwan (despite holding significant exposure to global semiconductor leaders in both markets). Our portfolio positioning remains focused on avoiding the most exposed energy importers and favouring markets with stronger external positions, greater policy insulation or direct benefits from higher energy prices. We remain significantly overweight Brazil, Mexico and China.

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