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An emerging-market stock market can fall during a nearby conflict because several shocks arrive at once: energy and import costs rise, growth and profits are marked down, inflation pushes expected interest rates higher, the US dollar often strengthens, and global investors reduce exposure to risky assets. Foreign selling can weaken the local currency, which then increases the domestic cost of foreign-currency debt and imports. The result is a feedback loop in which lower share prices, capital outflows and tighter financial conditions reinforce one another.
The size of the decline is not determined by the existence of conflict alone. Energy dependence, trade links, foreign ownership, reserve cover, debt currency, exchange-rate policy, market liquidity and institutional credibility determine how strongly a particular market reacts.
The main transmission channels
1. Energy, trade and inflation shock
Regional conflict can interrupt production, shipping routes, pipelines or insurance markets. Even when physical supply is not cut, traders may add a geopolitical risk premium to oil, gas and other commodities. An emerging economy that imports energy then pays more for fuel, electricity, transport and intermediate goods.
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That deterioration in the terms of trade reduces purchasing power. Households spend more on essentials, while companies face higher operating costs. Unless firms can pass those costs to customers, profit margins shrink. Import-intensive industries such as transport, chemicals, manufacturing and utilities can be hit first.
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Higher energy prices also lift inflation expectations. The International Monetary Fund’s April 2026 conflict analysis found that stock prices fell most in emerging markets, particularly energy importers, as investors reassessed terms of trade and central-bank policy expectations. Its Global Financial Stability Report said emerging-market assets, especially in commodity-importing and otherwise vulnerable economies, had been disproportionately affected.
2. Interest-rate and valuation repricing
When inflation is expected to remain high, investors price in tighter monetary policy. A central bank may raise its policy rate, keep rates high for longer or intervene less aggressively to support growth. Government bond yields can rise even before an actual rate increase.
Equity valuation is based on the present value of future cash flows. A higher discount rate lowers that present value, so high-growth companies and long-duration sectors can lose more than companies whose earnings arrive soon. Higher sovereign yields also raise the borrowing cost for banks and businesses, reducing investment and future earnings.
The IMF identifies dollar appreciation, higher global interest rates and falling equity prices as common triggers for sharp increases in risk premiums and rapid repricing. This explains why a company can lose value even when its factories and customers are far from the battlefield: investors are applying a higher required return to all of its future cash flows.
3. Risk-off portfolio outflows
Conflict increases uncertainty about economic policy, trade, security and future supply. Global funds often respond by cutting positions in emerging-market shares and bonds, moving toward cash, US-dollar assets or other markets perceived as safer. Cross-border portfolio flows to emerging markets are particularly sensitive to changes in global risk appetite, according to the IMF.
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Foreign selling can overwhelm normal local demand, especially in a small or thinly traded exchange. Prices may gap lower because there are few buyers at the previous price. A carry-trade unwind can add pressure: investors close positions that borrowed in a low-yield currency to buy higher-yielding emerging-market assets. The sale of those assets and repayment of the funding currency can happen quickly.
Outflows do not require foreign investors to believe that every listed company is fundamentally impaired. A fund may sell simply to reduce portfolio risk, meet redemptions or restore a target country allocation. That mechanical selling can make the index fall before company-level information changes.
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When investors sell local shares and bonds, they often convert the proceeds into dollars or another funding currency. The local currency can depreciate as a result. Depreciation raises the local-currency price of imported fuel, machinery, food and technology, adding to inflation.
Unhedged foreign investors can lose twice: once on the local asset and again when the weaker currency is converted back into their home currency. Those losses may prompt additional selling. The Bank for International Settlements calls this dynamic “original sin redux”: exchange-rate moves magnify the effect of capital-flow reversals because investors and borrowers cannot fully neutralize currency risk.
A weaker currency can eventually help exporters by making their goods cheaper abroad, but that benefit may arrive slowly. During a shock, the immediate effects—higher import prices, tighter policy and larger debt-service costs—usually dominate market pricing.
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5. Sudden-stop and balance-sheet stress
Emerging economies often have shallower domestic financial markets and greater exchange-rate pass-through to import prices than advanced economies. If external funding stops suddenly, companies, banks and governments may have difficulty rolling over short-term obligations.
Borrowers with dollar-, euro- or other foreign-currency liabilities owe more in domestic-currency terms after depreciation. A company whose revenue is mostly local but whose debt is in dollars can see its leverage and interest burden jump without issuing new debt. Banks may face similar mismatches if foreign-currency loans or wholesale funding exceed their foreign-currency assets.
The BIS warns that a sudden stop accompanied by large capital outflows can give rise to a financial crisis. Equity investors therefore discount not only lower profits but also the possibility of refinancing stress, emergency controls or forced asset sales.
6. Weaker growth and earnings expectations
Conflict can reduce domestic and regional demand through higher living costs, disrupted trade, weaker tourism and delayed investment. Companies exposed to neighboring countries may lose access to suppliers, customers or transport corridors. Governments may divert spending toward security or emergency support, leaving fewer resources for infrastructure and other growth projects.
Analysts then lower revenue, margin and earnings forecasts. Banks may increase provisions if borrowers are exposed to higher rates or weaker demand. Lower expected profits combine with higher discount rates, producing a larger equity decline than either shock would cause alone.
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7. A rise in the equity risk premium
Investors demand extra compensation for holding assets in a country that could face sanctions, policy mistakes, supply disruption or escalation. This additional equity risk premium lowers share prices even if the expected earnings path is unchanged. The premium can remain elevated after an initial selloff because uncertainty is difficult to measure and positions may stay underweight until the conflict’s duration and economic effects become clearer.
Which emerging markets are most exposed?
Exposure is multidimensional. A country can be an energy exporter yet remain vulnerable because of foreign debt, weak institutions or heavy foreign ownership. Conversely, an importer with strong reserves and credible policy may absorb the initial shock better.
| Vulnerability | Why it matters during conflict | What to examine |
|---|---|---|
| Net energy or commodity imports | Higher oil, gas or food prices worsen the trade balance and inflation outlook. | Fuel import bill, energy mix, subsidy burden and ability to pass costs through. |
| Foreign ownership of local assets | A global risk-off move can produce larger, faster portfolio outflows. | Foreign share of equities and bonds, investor concentration and redemption risk. |
| Current-account position | A deficit requires continuing external financing when markets are least willing to provide it. | Current-account balance, import coverage and composition of exports. |
| Foreign-currency debt | Depreciation raises the domestic value of principal and interest. | Currency denomination, hedging, maturity schedule and borrower cash flows. |
| Reserve adequacy | Reserves can smooth disorderly currency moves and meet external obligations. | Usable foreign-exchange reserves relative to short-term debt and imports. |
| Exchange-rate regime and central-bank credibility | Policy credibility influences inflation expectations and the cost of defending the currency. | Inflation history, policy framework, intervention capacity and communication. |
| Market depth and concentration | Thin trading and a few dominant sectors make prices more sensitive to forced selling. | Daily turnover, free float, index concentration and local institutional demand. |
| Fiscal and institutional strength | Weak public finances reduce room for energy support, guarantees or emergency lending. | Debt trajectory, fiscal credibility, legal stability and policy consistency. |
Energy importers
These markets face the clearest first-round shock when fuel prices rise. The combination of a wider trade deficit, higher inflation and weaker household demand can hit both the currency and domestically focused shares.
Markets dependent on foreign portfolio funding
Countries with a large foreign presence in local equities or bonds can experience abrupt outflows when global funds rebalance. The effect is strongest where local pension funds, insurers and banks are too small to absorb the selling.
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Short maturities create rollover risk. If lenders refuse to renew credit, borrowers must repay in a depreciating currency or refinance at sharply higher rates. Equity prices can anticipate that stress before defaults appear in official data.
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Commodity exporters are not automatically protected
Higher export prices may improve the trade balance for an energy or metals exporter, but that benefit can be outweighed by regional disruption, broad risk aversion, weak domestic institutions or foreign-currency liabilities. Export exposure should therefore be assessed alongside financing and governance risks rather than treated as a guarantee of market gains.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How the selloff typically unfolds
- Shock and repricing: News of escalation changes assumptions about energy prices, trade routes, inflation and policy rates.
- Global de-risking: International funds reduce emerging-market positions, often selling the most liquid securities first.
- Currency adjustment: Asset sales and conversion into foreign currency pressure the exchange rate.
- Policy response: The central bank may raise rates, use reserves or allow a larger currency move; each choice has costs for growth and valuations.
- Balance-sheet effects: Importers and foreign-currency borrowers report higher costs, while banks reassess credit risk.
- Second-round selling: Weaker earnings, margin calls, benchmark reweighting and redemption requests extend the decline.
This sequence is not mechanical. A ceasefire, restored shipping, policy support or a fall in global risk aversion can interrupt it. Conversely, escalation or a prolonged energy disruption can make each stage reinforce the next.
Why there is no “typical” percentage fall
Official studies emphasize heterogeneity rather than a universal decline. The same conflict can produce different outcomes depending on the country, the index, the measurement currency and the period chosen. A local-currency index may fall while a dollar index falls more because of depreciation; an exporter’s broad market may outperform an importer’s even as both decline.
Comparisons should specify the event window—such as the first trading day, first month or period from escalation to ceasefire—the benchmark index, whether dividends are included and whether returns are measured in local currency or dollars. Without those details, a single percentage gives a false sense of precision.
How to compare two emerging markets
Use the following sequence rather than relying on headlines about which country is closer to the conflict.
- Map the trade shock: classify each economy as a net energy importer or exporter and identify dependence on the affected region for fuel, food, components and shipping.
- Check external financing: compare current-account balances, reserve cover and the share of short-term external debt.
- Measure currency exposure: identify foreign-currency debt among governments, banks and major listed companies, and check whether revenues provide a natural hedge.
- Assess investor positioning: review foreign ownership of equities and bonds, market concentration and the ability of domestic institutions to buy during a selloff.
- Evaluate policy credibility: examine inflation expectations, the exchange-rate regime, fiscal flexibility and the central bank’s record of using reserves or other tools.
- Test market liquidity: a market with low turnover or a narrow group of index leaders can move more sharply when investors sell in a hurry.
What can moderate the decline?
Governments cannot remove the geopolitical shock, but policy preparation can reduce amplification. An IMF working paper covering 56 emerging-market and developing economies from 1996 to 2020 found that countries using preemptive capital-flow-management measures had relatively lower external-finance premia and exchange-rate volatility during risk-off shocks.
- Credible inflation frameworks: clear targets and consistent communication can limit unanchored inflation expectations.
- Adequate, usable reserves: reserves provide capacity to smooth disorderly currency conditions and meet external payments, although defending an unsustainable exchange rate can waste them.
- Sound fiscal policy: manageable debt leaves more room for targeted energy support without triggering a sovereign-risk scare.
- Deeper local markets: a broad domestic investor base and longer-maturity local-currency funding reduce dependence on volatile foreign flows.
- Prudent foreign-currency risk management: hedging and matching debt currency with export revenue limit balance-sheet damage from depreciation.
- Targeted capital-flow tools: preemptive measures can reduce destabilizing surges and reversals, but they do not replace credible macroeconomic policy or open-market access.
These defenses lower the probability that an external shock becomes a self-reinforcing financial crisis; they do not guarantee that share prices will rise during an active conflict.
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- Separate the direct conflict effect from the global dollar and interest-rate cycle.
- Check whether the country is an energy importer, an exporter or exposed through intermediate inputs.
- Look for currency losses and foreign-currency liabilities, not just the local equity chart.
- Distinguish temporary liquidity pressure from a deterioration in solvency or long-term earnings.
- Compare the market with peers that have similar energy exposure and financing structures.
- Use a clearly defined date range and currency basis before describing the size of the decline.
The central lesson is that an emerging-market selloff during regional conflict is usually a chain reaction, not a single fear trade. Commodity prices, inflation expectations, interest rates, the dollar, capital flows, exchange rates and corporate balance sheets interact. Markets with strong reserves, credible institutions, limited foreign-currency debt and deeper domestic funding can still fall, but they generally have more capacity to absorb the shock than markets already dependent on short-term external finance.
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