Emerging-market shares usually fall during a nearby conflict because several shocks arrive together: energy and input costs rise, growth forecasts are cut, inflation and interest-rate expectations increase, the US dollar strengthens, risk premiums widen, currencies depreciate and foreign investors withdraw capital. The effects are largest where a country imports energy, relies on short-term foreign funding, has substantial foreign-currency debt, or lacks reserves and policy credibility.
This is not a fixed-percentage event. The International Monetary Fund (IMF) wrote in its Global Financial Stability Report (2026) that “Emerging market assets—especially in commodity importing and more vulnerable economies—have been disproportionately affected.” The size and speed of a fall depend on the country, the conflict, the market’s currency basis and the period measured.
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The transmission chain from conflict to a stock-market selloff
A regional conflict changes the assumptions investors use to value companies and sovereign assets. The initial headline may concern security, but prices move as markets estimate its effects on energy, trade, inflation, interest rates, currencies, government finances and capital flows. These channels reinforce one another rather than operating independently.
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- Conflict raises uncertainty and often commodity prices. Investors mark down earnings and demand a larger compensation for risk.
- Import bills and inflation rise. Households lose purchasing power and companies face higher costs.
- Central banks and bond markets reprice. Expected policy rates and sovereign yields increase, reducing equity valuations.
- Global investors reduce exposure. Selling of local shares and bonds puts pressure on the currency.
- Depreciation amplifies the shock. Imported inflation accelerates and foreign-currency liabilities become more expensive in local money.
- Liquidity and balance-sheet stress can produce a sudden stop. Thin markets and short-term external funding make the decline sharper.
Energy, trade and inflation: the first economic hit
Why energy importers are vulnerable
Conflict can interrupt production, transport or insurance, or simply add a geopolitical risk premium to oil and gas. For an energy-importing economy, the country must spend more foreign currency to buy the same fuel. That worsens its terms of trade: the price of imports rises relative to the price of exports.
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Fuel is an input into electricity, transport, chemicals, agriculture and manufacturing. A higher import bill therefore spreads beyond petrol stations. Companies may absorb the increase and lose margin, or pass it to customers and reduce demand. Households face a similar trade-off between paying more for essentials and cutting discretionary spending. Lower expected consumption and profit margins lead analysts to reduce earnings forecasts.
The IMF’s 2026 conflict analysis links higher energy prices with higher inflation expectations and reports the largest stock-price declines in emerging markets, particularly among energy importers. That relationship is an exposure, not a rule: a well-prepared importer may absorb a temporary shock better than a highly leveraged exporter facing financial stress.
Trade disruption can hurt even without an energy shortage
Fighting near ports, railways, pipelines or major shipping routes can delay intermediate goods and raise freight and insurance costs. Exporters may lose access to customers, while manufacturers that depend on imported components face production interruptions. A country can therefore suffer from weaker trade volumes at the same time that its import prices rise.
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Inflation and interest-rate repricing reduce equity values
Higher inflation changes both the numerator and denominator of a share valuation. Companies may report larger nominal revenues, but real household demand and operating margins can deteriorate. At the same time, investors usually apply a higher discount rate to future cash flows when inflation and policy rates are expected to remain elevated. The present value of earnings that arrive years from now falls most sharply for high-growth, long-duration companies.
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Government bond yields often rise as investors demand compensation for inflation, fiscal risk and the possibility of tighter monetary policy. Those yields are a benchmark for corporate borrowing and for the required return on equities. Banks may also tighten lending standards as borrowers’ repayment capacity weakens. Businesses with floating-rate debt, short maturities or plans that require refinancing are especially exposed.
The IMF identifies a stronger dollar, higher global interest rates and equity downturns as common triggers for sharp increases in risk premiums. A country can therefore experience falling shares even when its domestic central bank has not yet changed its policy rate: markets price the expected response in advance.
Risk-off selling and foreign-portfolio outflows
Conflict raises the range of possible outcomes, including sanctions, supply interruptions and escalation. Global funds often respond by cutting positions in emerging-market equities and bonds, moving toward assets they perceive as more liquid or safer. This is a portfolio decision, not necessarily a judgment that every local company has become less productive.
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1Clear out junk files and repair common Windows errors2Fix the driver behind crashes, sound loss and screen glitches3Repair Windows errors before they cause bigger problemsEmerging-market flows are particularly sensitive to changes in global risk sentiment. The IMF reports that carry-trade unwinds and capital outflows can amplify currency pressure. When many investors sell at once, local market depth may be insufficient to absorb orders without a large price concession. A falling index can then attract more selling from risk limits, margin calls and benchmark-driven funds.
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Foreign ownership matters because an economy with a large overseas investor base can experience a bigger immediate flow shock. Domestic pension funds and households may provide a stabilizing bid in some markets, but they cannot always replace foreign liquidity, especially when local incomes and confidence are also under pressure.
How the currency feedback loop works
Foreign investors who sell local shares receive local currency and usually convert the proceeds into dollars or another reserve currency. Heavy conversion demand can weaken the exchange rate. A weaker currency raises the local price of imported fuel, food, machinery and medicine, feeding the inflation channel described above.
Unhedged investors can lose twice: first on the local asset and then when the depreciated currency is converted back into their home currency. The Bank for International Settlements (BIS) describes this dynamic as “original sin redux.” Losses can prompt further withdrawals, which create additional currency pressure and tighter domestic financial conditions.
Currency depreciation also changes corporate balance sheets. A company that earns mostly in local currency but owes dollars or euros sees the local-currency value of its debt increase. Banks can face the same mismatch through foreign-currency loans or wholesale funding. Exporters with foreign-currency revenue may gain a partial hedge, but only if their sales continue and their liabilities and imported inputs do not rise faster.
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When selling becomes a sudden stop
Emerging economies often have higher exchange-rate pass-through to import prices and shallower domestic financial markets than large advanced economies. In a deep market, sellers may find buyers quickly; in a shallow market, a modest outflow can move prices dramatically and make refinancing difficult.
The BIS states that “As a consequence of the latter, a sudden stop with large capital outflows can give rise to a financial crisis.” A sudden stop occurs when external financing that previously rolled over becomes unavailable or prohibitively expensive. Governments may struggle to refinance bonds, banks may lose access to wholesale funding and companies may delay investment or default. The resulting credit contraction feeds back into share prices and employment.
Which emerging markets are most exposed?
Vulnerability is a combination of external exposure, financial structure and policy credibility. The same conflict can produce a contained correction in one market and a disorderly selloff in another.
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Random freezes, missing sound and display glitches usually trace back to one bad driver. Find and replace yours safely.Free scan · under a minute| Risk characteristic | Why it increases the decline | What to examine |
|---|---|---|
| Net energy or commodity importer | Higher fuel and input prices worsen the terms of trade and raise inflation. | Net import position, energy mix and pass-through to regulated prices. |
| Large foreign holdings of local assets | Global risk-off decisions can create concentrated selling and currency conversion demand. | Foreign ownership of equities and bonds, investor concentration and repatriation rules. |
| Shallow liquidity or high leverage | Small orders move prices, while margin calls and refinancing needs force sales. | Trading depth, turnover, leverage and maturity of corporate and bank funding. |
| Foreign-currency debt | Depreciation increases the domestic-currency burden of interest and principal. | Currency denomination, hedging, debt-service coverage and maturity schedule. |
| Weak reserves or a strained current account | Authorities have less capacity to supply foreign currency or smooth disorderly moves. | Reserve adequacy, import cover, current-account balance and external debt. |
| Weak institutional credibility | Investors demand a larger risk premium and expect inflation or fiscal problems to persist. | Inflation history, central-bank independence, fiscal rules and policy consistency. |
Why exporters are not automatically protected
Higher oil, gas or agricultural prices can improve revenues for some commodity exporters. That benefit may support the currency and tax receipts, but it does not guarantee a rising stock index. Broad risk aversion can lower valuations across the region, conflict can disrupt production or transport, and higher global yields can raise financing costs for exporters as well as importers. Ownership structure, debt currency and proximity to the fighting can outweigh the commodity tailwind.
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What can moderate the decline?
Policy cannot remove the geopolitical shock, but it can prevent a temporary repricing from becoming a balance-sheet crisis. The IMF working paper Preemptive Policies and Risk-Off Shocks in Emerging Markets examined 56 emerging-market and developing economies over 1996–2020. It found that countries with preemptive capital-flow-management measures had relatively lower external-finance premia and exchange-rate volatility during risk-off episodes.
- Credible inflation frameworks: Clear targets, transparent communication and willingness to act can limit second-round price expectations.
- Adequate usable reserves: Reserves provide time to meet foreign-currency obligations and address disorderly market conditions, although they cannot defend an unsustainable exchange rate indefinitely.
- Usable foreign-exchange tools: Swap lines, intervention capacity and functioning hedging markets can reduce panic when liquidity disappears.
- Sound fiscal policy: Manageable debt and credible budgets reduce the risk that investors add a sovereign crisis to the conflict shock.
- Deeper local markets: A broad domestic investor base and longer-maturity local-currency funding reduce dependence on short-term foreign flows.
- Prudent capital-flow measures: Preemptive tools can reduce amplification, but poorly designed controls may impair market access or postpone adjustment.
How to compare two emerging markets
To assess which of two countries is more likely to fall, compare the same indicators rather than relying on the headline that one is an exporter or an ally. The following framework follows the vulnerabilities identified by the IMF and BIS.
- Map the shock: Identify each country’s net energy position, exposure to the conflict’s trade routes and dependence on imported intermediate goods.
- Check external financing: Compare current-account balances, reserve cover and the share of short-term external debt.
- Measure foreign ownership: Estimate how much of local equities and bonds is held by non-residents and how concentrated those holdings are.
- Inspect currency mismatches: Separate foreign-currency debt by government, banks and companies, then note maturities and hedges.
- Assess the exchange-rate regime: A flexible currency can absorb part of the shock through depreciation, while a hard peg may preserve short-term stability but consume reserves if pressure persists.
- Evaluate monetary and fiscal credibility: Review inflation expectations, central-bank independence, debt dynamics and the government’s access to funding.
- Allow for market structure: Thin turnover, a few dominant companies or a narrow commodity index can make an index move more violently than the wider economy.
How to interpret a fall in the index
A falling stock index does not identify one cause by itself. Separate the local-currency equity return from the return measured in dollars or euros. A market can be down modestly in local terms but substantially for a foreign investor after currency depreciation. Also distinguish an immediate risk-premium move from a deterioration in company earnings: the first may reverse if escalation is contained, while the second can persist through weaker demand, higher costs and refinancing stress.
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Why there is no typical percentage decline
Official analyses emphasize heterogeneity rather than a universal average. Energy exposure, global risk sentiment, dollar conditions, policy credibility, financial openness and balance-sheet vulnerabilities determine the outcome. Any claim that an emerging-market index normally falls by a particular percentage during a regional conflict is incomplete unless it specifies the country, conflict, event window, index, currency basis and whether dividends are included.
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