How Asia and EM equities are positioned to withstand shocks from the Iran war and benefit from structural trends

Near term volatility, enduring structural advantage

Despite the Iran war prompting an energy shock, inflationary pressures and concerns about growth, we believe the long term case for Asia and emerging markets (EM) remains robust and, in several areas, strengthened. Our base case is that the conflict will eventually abate – and that its economic after effects will reinforce the region’s drive towards greater self sufficiency in technology, manufacturing and energy. 

Our Asia High Conviction and Emerging High Conviction strategies tap into long-term structural themes grounded on the principle that investing in Asia and EM equates to investing in growth. The current war does not change that view or the long-term structural themes in these economies underpinning that growth, including: advances in technology and industrials, growing demand for critical metals and resources, and Asia’s expanding role as a global hub for wealth management and financial services. 

Indeed, we believe the recent correction in Asia and EM equities offers investors a fresh opportunity to access the region’s leading growth sectors.

Macro shocks met with structural resilience

The impact of the conflict on Asia and EM will vary by country, depending on its energy mix, reliance on imports, external buffers and links to global supply chains. Broad themes include resilience for energy exporters and nations with strategic industries, and greater pressure on energy-importing economies facing higher costs and slower growth. 

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Read more: Finding signals in the noise of the Iran oil shock

As a major oil exporter, Brazil stands to benefit meaningfully, with a significant positive impact on its expected growth trajectory

Geopolitical tensions are catalysing a major expansion
of Eastern Europe’s defence-industrial base 
and energy-sovereignty initiatives

Sector implications

Certain sectors in Asia and EM are well positioned to benefit as the conflict reinforces long-term investment themes. Global infrastructure spending on AI related hardware remains in a multi year expansion. Strength is also evident in advanced manufacturing and defence systems – particularly in South Korea – alongside opportunities in gold and copper. In financials, Asia’s rise as a wealth management hub continues to accelerate, supported by sustained inflows. 

Fig 1. Sectors and sub-segments with a strong opportunity set¹

Read also: TSMC: the chip powerhouse at the centre of geopolitics and technology

Spotlight on AI enablers, robotics and defence

Global AI infrastructure is in a multi-year phase of increased spending that is unlikely to be derailed. The order backlog for AI infrastructure semiconductors and systems has long-term visibility due to inherent supply constraints. Cloud service providers and hyperscalers are unlikely to significantly scale back IT spending in semiconductor, compute and datacentre hardware, as doing so would undermine infrastructure required for their AI-driven growth plans. 

Concerns persist about potential supply chain pressures stemming from energy shortages and the limited availability of critical gases such as helium. However, we believe technology-driven economies such as China, South Korea and Taiwan have sufficient inventories to prevent near-term production disruption and in months ahead. 

In industrials, we focus on companies in advanced manufacturing, robotics, clean energy and energy infrastructure supply chain. We expect defence systems to become an increasingly important export engine for South Korea, whose companies’ weapon systems are performing well in deployment. Demand is likely to rise as countries in the conflict region increase defence spending and diversify suppliers.

Read more: Agentic and sovereign AI: artificial intelligence comes of age

The case for gold, copper and wealth management

In precious and critical metals, we favour gold and copper. The pullback in gold and copper miners due to rotation into USD assets provides, in our view, another entry point to invest in these companies. Copper’s structural long-term supply deficit, strong demand outlook and essential role in power infrastructure further reinforce the investment case.

While the USD is currently perceived as a safe haven, rising US debt to finance the war detracts from the greenback’s strength. A softer USD may be compounded by global central banks continuing to diversify reserves amid long-term concerns about US credibility issues and debt sustainability. 

Asia’s position as a wealth-management hub
should strengthen further, in our view

Asia’s position as a wealth-management hub should strengthen further, in our view. While Hong Kong and Singapore have attracted strong inflows in recent years, the Middle East conflict and more permanent geopolitical realignments could drive additional wealth into Asia – supporting banking names. 

Read more: Iran oil shock: how could the US, Europe and Asia be impacted?

Risk areas to monitor

While we retain high conviction in Asia and EM, there are a few sectors where we limit exposure in the near term until there is greater clarity about how the US, Israel and Iran may pursue de-escalation, and on the longer term implications for regional geopolitical risk. 

Fig 2. Sectors and sub-segments to pare back²

Force majeure affecting Middle East suppliers has disrupted supply for gas utilities and oil marketing companies, leaving them exposed to rising costs, demand destruction and the need to substitute other sources of fuel.  

Pressured by higher jet fuel costs, airlines are raising fuel surcharges and airfares, which is likely to curb demand as non-essential travel is postponed or cancelled. In developing economies, consumers adjusting to higher energy prices will prioritise essentials and reduce discretionary spending. Demand for consumer electronics may weaken accordingly, while OEMs face rising bills of materials. In automotives, we expect a shift in purchase intentions from ICE vehicles towards EVs.  

In Middle East real estate, Dubai property remains at risk. The market was already close to oversupply before the conflict, and this is likely to materialise over the next 12 months as the city’s safe haven reputation will take time to rebuild.

Strength beyond the shock

Asia and EM remain structurally advantaged despite near term volatility. While the Iran war introduces energy related and inflationary pressures, the region’s long term growth drivers – from technology and industrial innovation to critical materials demand and wealth management expansion – remain solid. For long term investors, the recent market correction provides an opportunity to re engage with high conviction themes across Asia and EM, supported by country level resilience and sector level strength.

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