U.S.-Iran Conflict Highlights Risks in Emerging Market Concentration
By John Nada·Mar 6, 2026·4 min read
The U.S.-Iran conflict reveals concentration risks in emerging markets, especially within tech-heavy sectors. Strategic diversification may offer better stability for investors.
The ongoing military conflict between the U.S. and Iran has illuminated significant concentration risks within emerging markets, particularly as investors seek returns outside the S&P 500. With the iShares MSCI Emerging Markets ETF (EEM) showing strong performance recently, the underlying risks tied to specific regions and sectors have become increasingly apparent, especially when many of the top stocks are linked to the AI boom. According to Malcolm Dorson, a senior emerging markets portfolio manager at Global X, the index for emerging markets is still roughly 80% concentrated in Asia, raising concerns about vulnerability to geopolitical tensions.
Investors have poured money into emerging markets in recent years as the search for big stock gains has migrated overseas and as they look for diversification beyond the concentrated S&P 500. The iShares MSCI Emerging Markets ETF (EEM) has had strong performance over the past few years and into 2026, up 29% in 2025 and still holding onto a small gain this year. However, its holdings remain largely tilted toward Asia, with large exposure to China, South Korea, India, and Taiwan, together representing over three-quarters of the index weight, and many of the top stocks tied to tech, including Taiwan Semiconductor and Samsung. "If you look at the index within emerging markets, it's still roughly 80% Asia," Malcolm Dorson said on CNBC's "ETF Edge" earlier this week.
"That gives you a lot of concentration risk," he emphasized, noting that the tech sector alone holds over a 30% weighting in the EM index. Recent volatility in South Korean stocks exemplifies these risks. South Korea's index endured its worst single-day decline recently, driven by fears regarding energy supply disruptions amid escalating tensions in the Middle East. This volatility reflects how interconnected the tech sector is with broader market forces, as companies like SK Hynix and Samsung, which are integral to the AI sector, face pressures from energy constraints.
After its worst day ever, the South Korean index rebounded on Thursday for its best day since 2008. Despite this rebound, the iShares MSCI South Korea ETF (EWY) is still down close to 13% this week, showcasing the fragility of these markets. The enormous volatility in South Korean stocks can be attributed to their recent performance, where retail investors have seen significant gains, with SK Hynix gaining 274% last year and Samsung rising by 125%. The military conflict has also triggered a surge in oil prices, with Brent crude futures rising over 30% in a short period.
On Friday, Brent crude futures topped $90 and U.S. West Texas Intermediate crude futures were closing in on that range, up more than 30% this week, while Brent has advanced nearly 26%. This spike has prompted Asian countries, including China, to reconsider their energy export strategies, potentially leading to further strain on the availability of energy resources. Reports indicated that China has instructed domestic oil refining companies to halt any exports of fuel, a move that could be mirrored by other Asian nations as they seek to safeguard their energy stockpiles.
The implications for emerging markets are profound; ETF strategists argue that while emerging markets might still hold long-term promise, a more diversified investment approach is essential. In response to the shifting dynamics, Dorson recommends a 'barbell approach' to investment, balancing exposure between different regions to mitigate risks, particularly in light of rising oil prices benefitting commodity-rich Latin American countries. Latin American economies, such as Argentina, Brazil, and Colombia, could serve as a counterbalance to the concentrated Asian markets, as their stocks trade at significant discounts compared to U.S. equities.
Many of these Latin American countries are also undergoing political reforms that could enhance their economic prospects, particularly in the financial services sector. Equities in several Latin American markets also trade at significant discounts to U.S. stocks, with many price-to-earnings ratios roughly half those in the S&P 500. For example, Vanguard's S&P 500 ETF, VOO, currently trades at a P/E ratio of 28, while its emerging markets ETF, VWO, trades at a P/E ratio of 18.
This disparity hints at potential value for investors willing to navigate the complexities of these markets. Dorson highlights that about 25 to 33% of the investment narrative should focus on the attractiveness of gaining exposure to commodities, particularly as rising oil prices can provide an additional tailwind for economies in these regions. In a landscape where geopolitical events can rapidly shift market dynamics, the current situation underscores the importance of strategic diversification. Investors should remain cautious yet opportunistic, recognizing that emerging markets, while volatile, can also present lucrative opportunities if approached judiciously.
Dorson notes that all eyes are on political changes in Latin America that could drive fiscal reform and ultimately benefit financial services sector stocks across the region.