Emerging market equity funds slide as Iran conflict sparks selloff

• MSCI emerging markets index declined 6% versus 2.2% for MSCI World and 0.7% for MSCI United States during the same period
• Weekly inflows into EM equity funds slowed to $5.8 billion, the lowest level in seven weeks, as investors pulled back from approximately 13,000 tracked funds
• Goldman Sachs maintains forecast for 25% growth in MSCI EM earnings per share but warns that higher valuations following strong 2024 gains leave markets vulnerable to near-term correction risks

Summary: Emerging Market Equity Funds Slide as Iran Conflict Sparks Selloff

Emerging market (EM) equity funds have experienced steep declines in March as escalating Iran conflict tensions drive investors away from risk assets, positioning them among the worst-performing asset classes.

Key Performance Data:

• MSCI's emerging markets equities index fell more than 6% this week
• By comparison, MSCI World Index declined 2.2% and MSCI United States dropped just 0.7%
• Weekly inflows into EM equity funds slowed to $5.8 billion, the lowest level in seven weeks

Hardest-Hit Markets:

According to LSEG Lipper data tracking 518 fund categories, equity funds focused on Pakistan, Chile, Greece, Colombia, Argentina, UAE, and Saudi Arabia were among the biggest decliners over the past month.

Market Context:

The selloff follows strong EM gains earlier this year, which were driven by attractive valuations, solid growth prospects, and U.S. dollar weakness. This recent performance reversal highlights the vulnerability of these markets to geopolitical shocks.

Analyst Outlook:

Goldman Sachs maintains a cautiously optimistic stance, forecasting 25% growth in MSCI EM earnings per share. The firm suggests that if disruptions prove short-lived, broader earnings impact may remain limited due to resilient sector composition. However, Goldman warns that higher valuations following last year's strong gains leave EM equity markets exposed to near-term correction risks.

Broader Implications:

The data underscores emerging markets' heightened sensitivity to geopolitical instability compared to developed markets, with investors demonstrating clear risk-off behavior amid Middle East tensions.