Assessing the Impact of Geopolitical Tensions on Emerging Market Exposure: Strategic Reallocation in Defense, Energy, and Resilient Infrastructure

The 2025 Israel-Gaza conflict has catalyzed a seismic shift in emerging market investment dynamics, particularly in defense, energy, and infrastructure sectors. As geopolitical tensions reshape risk profiles and capital flows, investors are recalibrating portfolios to prioritize resilience, diversification, and strategic alignment with conflict-adjacent regions. This article examines how the conflict is driving capital reallocation and identifies firms and projects poised to benefit from the new geopolitical normal.

Defense: A Surge in Strategic Partnerships and Technological Transfer

The conflict has accelerated defense-industrial collaboration between Israel and Gulf states, with the UAE emerging as a key partner. The reported $35 billion natural gas pipeline deal between Egypt and Israel's NewMed company is not just an energy agreement—it reflects a broader trend of infrastructure and defense integration. For instance, the UAE's EDGE Group and Israel's Elbit Systems are collaborating on the Hermes 900 UAV, a long-endurance drone capable of carrying advanced payloads. This partnership includes technology transfer and localized production, positioning the UAE as a regional hub for defense manufacturing.

Elbit Systems, a key player in this ecosystem, has seen its stock rise by over 15% in 2025, driven by increased demand for missile defense systems and cyberwarfare solutions. Similarly, Gulf-based firms like Saudi Arabian Military Industries (SAMI) are expanding their capabilities through joint ventures with Israeli counterparts, focusing on AI-driven surveillance and unmanned systems. Investors should monitor defense ETFs such as the iShares Global Defense & Aerospace ETF (IXN), which has outperformed broader markets by 8% year-to-date.

Energy: The Geopolitical Risk Premium and LNG Infrastructure

The Israel-Gaza conflict has embedded a “geopolitical risk premium” into energy markets, with Brent crude prices peaking at $120 per barrel in Q1 2025 due to tensions in the Strait of Hormuz. This volatility has spurred a surge in liquefied natural gas (LNG) demand, with rerouted shipping traffic increasing transportation costs by 15–20%. Egypt and Jordan, both reliant on Israeli gas imports, are now prioritizing LNG infrastructure to mitigate supply shocks.

Egypt's $35 billion pipeline project with NewMed, set to begin operations in 2028, is a case in point. The pipeline will transport gas from Israel's Leviathan field to Egypt's Damietta and Idku liquefaction terminals, enabling re-export to Europe and stabilizing domestic supply. Meanwhile, Jordan is accelerating its LNG import infrastructure, with Gulf sovereign funds investing in green hydrogen projects to diversify energy sources.

Investors should consider energy firms with exposure to LNG infrastructure, such as Egypt's Orascom Construction (OCX), which is involved in the Damietta terminal expansion. Gulf-based companies like ADNOC (ADNCO) and Saudi Aramco (SAPG) are also benefiting from regional energy diversification efforts. The iShares Global Energy ETF (IXC) has gained 12% in 2025, reflecting the sector's resilience amid geopolitical uncertainty.

Resilient Infrastructure: Building for the New Normal

Infrastructure projects in conflict-adjacent regions are increasingly framed as both economic and security imperatives. Egypt's military-run Future of Egypt Project, for instance, is expanding digital infrastructure and emergency communication systems in Suez, aligning with Vision 2030. Similarly, Jordan is leveraging its role in the India-Middle East-Europe Corridor (IMEC) to boost digital and physical infrastructure, including AI-ready grids and data centers.

Gulf sovereign funds are also investing in green hydrogen and AI-ready grids, with Egypt's involvement in these projects seen as a strategic complement to its geographic position. For example, the UAE's Masdar (MASF) and Saudi NEOM are collaborating on hydrogen projects that could serve as a long-term energy buffer against regional instability.

Investors should prioritize infrastructure ETFs like the iShares Global Infrastructure ETF (IGF), which has gained 9% in 2025. Specific projects, such as Egypt's Lake Bardawil development or Jordan's LNG terminals, offer high-conviction opportunities for those seeking exposure to ecosystem-driven resilience.

Conclusion: A Proactive Tilt Toward Resilience

The Israel-Gaza conflict has fundamentally altered the risk landscape for emerging market investments. Defense, energy, and infrastructure sectors in conflict-adjacent regions are no longer peripheral—they are central to global capital reallocation. Firms engaged in strategic partnerships, LNG infrastructure, and green energy transitions are best positioned to capitalize on this shift.

For investors, the key takeaway is clear: a proactive tilt toward these sectors, particularly in Egypt, Jordan, and Gulf states, offers a hedge against geopolitical volatility while aligning with long-term trends in energy transition and digital infrastructure. As the region's dynamics evolve, adaptability and a focus on resilience will remain paramount.