It took about two months for investors in emerging markets to evaluate the escalation of the Iran conflict, regroup, and begin purchasing assets again.
Data from the Institute of International Finance reveals that a significant influx of capital returned to emerging market assets in April 2026, signaling a recovery from the downturn caused by the conflict that began around February 28.
#What Impact Did the Iran Conflict Have on Emerging Markets?
The escalation surrounding Iran adversely affected emerging market portfolios in late February. Top-performing funds from 2025, which had seen returns of 30% to 40% last year, began to experience substantial losses. These losses were between -6% to -8.6% for many of these previously high-performing funds.
The initial fallout wiped out the gains that emerging market stocks had built up during January and early February 2026. By April, however, capital started to flow back in. The Institute of International Finance confirmed the market’s bounceback as investors perceived the downturn as an ideal opportunity to buy rather than a reason to exit.
#Why Did Investors Re-enter the Market So Quickly?
Investors returned rapidly due to attractive opportunities within emerging market debt, with the sector demonstrating continued structural momentum. While recovery was not uniform across all markets, China-focused products emerged as notable winners. Exchange-Traded Funds such as the Amundi MSCI China ESG Selection Extra and the Invesco ChiNext 50 UCITS ETF showed resilient performance in the new post-conflict environment.
#What Should Investors Take Away From This Situation?
The Institute of International Finance data reinforces a long-standing strategy embraced by emerging market allocators, which is to buy into geopolitical downturns. Funds that retained their positions amid the February-March downturn stand to benefit from the recovery. Conversely, those who panicked and sold have realized losses of 6% to 8.6% and now face the decision of whether to re-enter the market at elevated prices.
Notably, by May 2026, 62% of the leading funds from 2025 had fallen into the bottom quartile, highlighting the extensive damage sustained from the initial upheaval.