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Impact of Iran conflict on emerging markets debt

Kirstie Spence Harry Phinney

KEY TAKEAWAYS

  • If the Iran conflict is sustained, the global shock has the potential to affect emerging markets (EM) through energy markets, trade routes and macro resilience — creating risks and opportunities for research‑based investors.
  • Many EM would enter a prolonged stress scenario from a stronger starting point than in past cycles, suggesting a differentiated shock rather than a systemic EM event.
  • Even under sustained pressure, high local carry and improving policy credibility in more fragile EM could still offer attractive compensation for elevated risk premiums.

We are only days into the Iran conflict. So far, EM assets have traded in a volatile, risk‑off environment, but the overall response has been more resilient than might have been expected given the scale of the escalation to date. This can leave markets vulnerable to further deterioration if the conflict intensifies — but also underscores the stronger macro starting point across much of EM.

 

This white paper looks beyond the initial market reaction and considers how a more sustained conflict — and a prolonged period of elevated oil prices — could transmit across EM. While higher energy prices dominate the near‑term outlook, the medium‑term path for oil is less certain. In a scenario where tensions de‑escalate and sanctions on Iran are meaningfully eased, additional supply could return to global markets, placing downward pressure on prices over time.

 

Should the conflict persist, its effects would constitute a multifaceted shock for EM, operating through three main channels: Energy; Trade routes, shipping and logistics; and EM vulnerability. How these channels interact will determine whether higher oil prices act as a stabilizer or a source of strain, producing varied outcomes across regions and sovereigns. If the conflict is sustained, years of macro adjustment mean many EM would enter this episode with stronger buffers, more credible policy frameworks and deeper local markets than in earlier cycles — making it less a test of systemic vulnerability and more one of differentiation.

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Kirstie Spence is a fixed income portfolio manager with 30 years of investment industry experience (as of 12/31/2025). She is the principal investment officer for the Capital Group Emerging Markets Local Currency Debt LUX Fund and serves on the Capital Group Management Committee. She holds a master's degree with honors in German and international relations from the University of St. Andrews, Scotland. 

Harry Phinney is a fixed income investment director with 20 years of industry experience (as of 12/31/2025). He holds an MBA in international business from Northeastern University, a master's degree in applied statistics and financial mathematics from Columbia University and a bachelor's degree in international political economy, graduating magna cum laude, from Northeastern University. 

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