FEATURE | Emerging markets: Twists and turns

On March 24, merely weeks into the US-Israel war on Iran, the Philippines became the first domino to fall when President Ferdinand Marcos Jr. declared a national energy emergency.

The closure of the Strait of Hormuz, a critical maritime chokepoint, which according to United Nations (UN) carries about one quarter of the world's seaborne oil trade, sent supply chains and crude oil prices into a tailspin, and exposed the country's overreliance on the Middle East to supply nearly all its oil.

As part of the first nationwide energy-saving measures, Marcos rolled out a four-day work week and imposed limitations on air-conditioning usage for government workers. He recently suspended fuel tax excise on liquified petroleum gas and kerosene and implemented temporary work-from-home arrangements for private companies.

The Philippines' crude oil supply, Marcos said, will last until June 30.

SunAsia Energy chief executive Maria Theresa Capellan says the Philippines is not like the rest of the Association of Southeast Asian Nations (ASEAN).

"We don't have coal. We don't have oil. We're totally and largely dependent on fossil fuel, and this is the reason and driving force behind our transition to clean energy," she says.

When she addressed the Asia Pacific Investment Summit in Sydney in late March, the country had about 60 days of fossil fuel stock left.

"That is how vulnerable the Philippines is right now. As early as 2005, the government started its path towards the clean energy trajectory. In 2009, it enacted the law, the Renewable Energy Act, and committed the energy system, our energy mix to reach 35% renewables by 2030 and 50% by 2040," she says.

A newly published report by the UN estimates the military escalation in the Middle East will cost Asia and Pacific countries US$97 billion to US$299 billion in output losses.

Through higher fuel, freight and input costs, what is at stake is diminishing household purchasing power, rising food insecurity, strained public budgets and weakening livelihoods.

"In contexts where social protection systems are limited or fiscal buffers are constrained, these pressures may translate quickly into increased poverty and vulnerability," the UN said. Disruptions to remittance flows and exchange rate pressures may also weaken household resilience across parts of the Asia Pacific.

The Iran conflict represents an "exceptional negative supply shock" to global commodity markets with significant implications for emerging and developed economies alike, says Pendal Group senior portfolio manager Ada Chan.

Experts anticipate inflation will rise across all countries via energy prices at first. This will then spill over to food prices as driven by fuel and fertiliser costs.

Within Asia Pacific, which is home to many emerging markets, the crisis created an evident split.

"These inflation effects are expected to be most acute in emerging markets Asia and (as in 2022) in the world's poorest nations," she says.

"Energy importers are the clear losers, with several large economies highly exposed."

ASEAN: A new asset class

Dato Mohammad Faiz Azmi, the previous chair of the ASEAN Capital Markets Forum, is optimistic about the future of ASEAN as a formidable investment destination as members make concerted efforts to make it so.

When the Strait of Hormuz eventually opens, Azmi says, the question then becomes: are ASEAN's fundamentals strong enough to attract foreign investors?

Last year, off the back of US President Donald Trump's Liberation Day tariffs and in formulating their ASEAN's five-year plan, the member countries came together to do something unprecedented.

"For the first time, we decided to leave our swords at the door and talked about: how do we talk about ASEAN as an asset class? That requires a lot of thinking in terms of national policies and removing frictions. That got baked into the plan. We decided that, because of this massive [tariffs] shock, we needed to be nicer to our friends," he told the recent Asia Securities Industry & Financial Markets Association (ASIFMA) Annual Conference.

A regional intergovernmental organisation, ASEAN consists of 11 countries that include Malaysia, Thailand, Philippines and Singapore, aiming to promote economic growth, regional peace and cooperation, social progress and cultural development.

Initiatives members are trying to make a reality include synchronising some key policies, such making dual listings between member countries more efficient, Azmi explains.

"The other thing we realised is we're pretty bad at telling our story as a region. Most regions of the world would love to have a growth rate 5% to 6%. And it's happened quite consistently, with one to two blips here. But generally, as a region, it's been quite good," he says.

Sean Taylor, chief investment officer at Matthews Asia, remains positive on emerging markets relative to the rest of the world and Japan and Australia, pointing to a 16% earnings potential over the next two years and the growing trend toward international diversification.

Virtually in the last 10 years until last year, Taylor says emerging markets had very little to no earnings compared to the previous 20 years.

"Covid dampened their earnings ability further. It has been five years, but it's taken these economies a long time to come out of Covid. They didn't get support from the government that other markets got," he says.

The second tailwind for emerging markets is a weaker US dollar. For many markets, a weak dollar means a stronger local currency.

"If you've got a lot of debt, you're paying less immediately. It means that inflation is generally lower because of the currency. It means the spending power of the consumer is higher. It means central banks can cut rates without worrying, and it means growth picks up and investment picks up. It's a virtuous cycle," Taylor says.

About 18 months ago, Banyantree Investment Group investment manager and director Zach Riaz began talking to clients about introducing resources, such as natural gas, into their multi-asset strategy, "off the back of we how think the world is changing from intangible assets to hard assets."

While this was not a "big bet" per se, it was in response to the shifting investment landscape.

"We think there is potentially elevated inflation in the future, so let's at least provide our portfolio some buffer to those potential risks," he says.

This involved adding a natural resources manager to the fold and urging clients to keep gold and take a broader commodities exposure. The portfolio was subsequently underweight risk assets in anticipation of an attack on Iran.

Come late 2025, Riaz and the team briefed clients about a potentially volatile first half of 2026 that could deliver a 10% to 20% correction.

"Towards the end of last year, and the start of this year, if you look at the incentives of the different players in this conflict - Israel, the US and Iran - there is no way you would have concluded anything but that there will be an attack," he says.

"The incentive structure, the agendas of the different players, was always going to lead to an attack. The off ramps are very cloudy at best. People think that a deal will be done. I hope a deal would be done."

Russia and China: End game?

A two-week ceasefire took effect on April 7 where each side pledged to halt military strikes. A week later, the US 'blockaded Iran's blockade'. Washington said Trump directed "a bold and decisive US naval blockade to counter Iranian aggression and restore safe passage through the Strait of Hormuz."

Since the ceasefire, Al Jazeera reports only 45 ships have entered or exited the strait since then, while ship traffic through the strait plummeted by about 95% since the start of the war.  On April 21, Trump extended the ceasefire indefinitely.

Overnight, Bloomberg reported that a US source says Iran and the US have reached a tentative deal to extend a ceasefire as peace negotiations continue. But it is unclear whether Iran is onboard. In recent days, both sides renewed fighting around the Strait of Hormuz while Israel intensified its invasion and bombing of Lebanon.

Independent journalist Richard Medhurst says the US has "quietly been carrying out an armed robbery of the world's oil and gas supply".

He said: "We are witnessing the transition of the United States from an empire into a pirate state, and the birth of what I call the 'Petro Gas Dollar' or the 'LNG Dollar.'"

In the past three months, Medhurst analysed the US targeting Russian tankers, crippling China's oil supply, and capturing significant oil fields.

According to China's General Administration of Customs, Russia, Saudi Arabia, Malaysia, Iraq and Brazil accounted for 62% of China's crude imports in 2025. However, oil from US-sanctioned countries - Russia, Iran and Venezuela - reportedly export a vast amount of oil to China.

"China probably imported at least 2.6 million barrels per day (bpd) of sanctioned crudes in 2025, over 22% of total imports. This estimate includes 1.38 million bpd from Iran and 389,000 bpd from Venezuela, according to Kpler, and at least 800,000 bpd of oil from Russia," according to research organisation the Centre on Global Energy Policy.

"It is difficult to determine exactly how much crude the Russian oil companies sanctioned by the United States - Rosneft, Lukoil, Surgutneftegaz and Gazprom Neft - shipped to China because there is no publicly available, official data that show Russian exports to China by company."

Medhurst goes on to say the US has become the world's top LNG exporter, exploiting the Nord Stream pipeline's destruction to force Europe to buy American LNG at higher prices.

"The strategy aims to weaken competitors like Russia and China, drive up global energy prices, and secure the USD's dominance," he says in his new documentary The Petrogas Dollar: The secret US strategy behind the Iran war.

Targeting Venezuela, Russia and Iran, the US has ultimately forced China to buy American oil and gas.

"The United States is transitioning from an aerial power to a naval power, fully cementing their status as a pirate state," he says. America's Maritime Action Plan released in February, is a testament to this.

"If they're able to control others' economies, they may not even need to maintain their 800 bases. From a purely business perspective, when corporations find a more efficient way to do the exact same thing and save costs, they always go for it. So why wouldn't that apply? In this case, none of these events are coincidences," he says.

"None of these things happened by accident. They were all carefully planned at the highest levels of government and corporate America."

Some experts believe China will come out on top regardless of the direct or indirect punches the US throws at it.

European think tank Bruegel believes China is better positioned than other Asian countries to withstand the energy crisis, but its exports could take a hit.

"A sharp reduction in global growth will end up as additional overcapacity and even thinner corporate profits, with severe consequences for the financial health of Chinese companies. Wage growth already stands at barely 1% and could drop lower," Bruegel said.

"This will further reinforce the weakness of domestic demand in China, with less investment from profitless companies and deceleration of consumption."

Taylor remains optimistic about China, predicting big growth in its services and tourist industry.

"At the moment, a lot of growth in China is driven by government policy to be self-sufficient - to be equivalent to the US in semiconductors and innovation," Taylor says.

"A lot of that is driven by academics, whether it's private sector research or government research. They're using AI and robots a lot more in technology and it's not creating more jobs to the degree it did in the past."

China's household balance sheet is also healthy, underscoring consumer confidence.

"Money is now being spent on long-term  savings through insurance companies, financial products, and dividend funds," he says.

Consumption is estimated to growing at 4% to 5%, he adds, noting as consumers are gaining confidence as the property market stabilises, and the stock markets go up these will lead to positive wealth effect.

Nothing to fear

Each trading day since the start of the conflict has dragged investors through wild swings and pirouettes.

South Korea's Kospi, for example, dropped nearly 20% in early March only to unwind most of the losses in April. Interestingly, March year-to-date MSCI figures show that emerging markets were close to a full recovery. In 2025 and over a 20-year run, emerging markets have outperformed the MSCI World Index by 10.6% p.a. and 1.4% p.a. respectively.

The energy crisis has spurred the urgency for emerging economies to commit and take action on net zero goals even more.

SunAsia's Capellan says this is important for the Philippines as it declares its commitment to transition into clean energy.

"I think investment will have to be a major part of it, because the Philippines is a liberalised market, and as we transition, we don't only transition our generation, but the infrastructure that goes with it," she says.

Macquarie Group has been instrumental in SunAsia's initiatives and bridged an early-stage financing gap and facilitated other funding mechanisms.

"Opportunities for grid improvement, that's an investment area, opportunities for storage, opportunities for electric vehicle, opportunities for charging stations and opportunities for software when we do peer-to-peer trading etc.," Capellan says.

"Once there is a commitment for long-term investments, all these opportunities open, and therefore that partnership takes you to the transition where we want to be, not only on the generation side, but the entire chain of energy transition."

Banyantree's portfolio aims to provide clients 8% p.a. to 12% p.a. return through the cycle parameter.

"We take a core barbell approach to our portfolios. The core or 60% to 80% of the portfolio are long-term, buy-and-hold, good quality companies, or good-quality investment managers or ETFs, that we can hold through the cycle," he says.

The remaining 10% to 30% are more actively managed. Frontier markets fall into this category. Banyantree typically holds a 12 to 15-month view on these allocations, which provide the ability to move out earlier if things do not pan out as expected.

"With that in mind, we're not looking for high-octane strategies or ideas but be able to take advantage of them," he says.

"Frontier markets are not as scary as people think they are. Some of the things that we are used to in developed markets are slowly being introduced in frontier markets. So, there's a long growth runway, because they're catching on to smartphones or doing business online, online payments and whatnot."

Frontier markets also have a young cohort that are adopting some of the things developed markets have fully integrated into everyday life.

The 28 countries MSCI classifies as a frontier market include Vietnam, Romania, Bangladesh Jordan, Slovenia and Morrocco.

"Frontier markets provide a decent yield, low correlation and a lot of the risks are idiosyncratic to the individual sovereign nation," Riaz says.

"Adding frontier markets to an international global portfolio or finding a good manager who can specialise in frontier markets underscores a genuinely diversified global strategy."

If the US-Israel-led war on Iran has taught businesses and governments anything thus far it is the importance of diversification - across suppliers and geographies.

For countries like the Philippines, and even Australia, it is also a bitter lesson on oil-refining self-sufficiency.

And, if it has taught investors anything, it is that money doesn't make the world go around. Oil does.