Emerging Markets Stocks and FX Hit Two-Week Low Amid Iran-Israel Conflict

Emerging market stocks and currencies hit a two-week low as tensions between Iran and Israel fueled risk aversion. The conflict heightened concerns about global economic stability, leading to a decline in stocks and a flat FX market. Despite the setback, Asian currencies and stocks are set to post monthly gains.

Emerging market stocks and currencies hit a two-week low on June 19, 2025, as tensions between Iran and Israel fueled risk aversion. The conflict heightened concerns about global economic stability, leading to a decline in stocks and a flat FX market. Despite the setback, Asian currencies and stocks are set to post monthly gains.

The escalating conflict has introduced a new layer of risk to Middle East geopolitics, posing a short-term threat to global markets. For India, the most immediate concern is the surge in crude oil prices, which could negatively impact the current account deficit (CAD), fiscal balance, and inflation [1]. Emkay Global, in its latest weekly strategy note, highlighted that the rally in the Nifty has eroded valuation comfort, and further escalation in the Middle East could prompt a correction. Nonetheless, Emkay remains optimistic about India’s medium-term prospects, citing a likely earnings rebound supported by aggressive RBI rate cuts and softening commodity prices [1].

Emerging market assets came under pressure on Friday, mirroring a risk-averse sentiment in global markets following Israeli strikes on Iran's nuclear facilities and missile factories, sparking promises of retaliation from Tehran [2]. Key Latin American stock indexes and currencies saw notable declines. The MSCI LatAm index slipped 0.75%, and the Brazilian real USDBRL edged down 0.2% against the dollar [2].

Despite the setback, Asian currencies and stocks are expected to post monthly gains. Asian currencies have shown resilience, with the Indian rupee (INR) and Japanese yen (JPY) gaining ground against the U.S. dollar (USD). Stock markets in Asia, particularly in India and China, have shown signs of recovery, driven by positive earnings reports and government stimulus measures.

Domestic mutual fund flows in India continued to strengthen through May, following the market rebound in April and a temporary easing of global risk sentiment. Foreign portfolio investor (FPI) outflows have moderated since March and turned positive in May [1]. Emkay cautions that renewed geopolitical tensions could trigger another round of FPI selling, though it remains optimistic about medium-term flows.

In conclusion, the recent setback in emerging market stocks and currencies is a result of heightened geopolitical tensions and risk aversion. However, the medium-term prospects for emerging markets remain positive, driven by factors such as earnings rebound, aggressive monetary policy, and government stimulus measures. Investors should closely monitor the situation and stay informed about the latest developments.

References:
[1] https://www.businesstoday.in/markets/stocks/story/israel-iran-conflict-impact-on-indian-stock-market-sectors-to-watch-480475-2025-06-16
[2] https://www.tradingview.com/news/reuters.com,2025:newsml_L4N3SG1DK:0-latam-assets-fall-on-risk-aversion-after-israel-iran-tensions-explode/