Emerging-market ‘virtuous loop’ seen, despite Iran war

A structural convergence between advanced and developing economies is creating “significant” opportunities in emerging markets even as escalating tensions in the Middle East unsettle global investors, according to DoubleLine’s Bill Campbell.

Developing-world markets may be on the cusp of a “virtuous feedback loop,” should the dollar resume its slide and central banks continue rate cuts, said Campbell, who oversees the global sovereign debt team at Jeffrey Gundlach’s firm.

“EM local fixed income presents several sources of value,” he wrote in a note. Those opportunities should come as “welcome relief to global investors who find DM financial assets at stretched valuations.”

The resilience of emerging markets is being put to the test this week as the dollar surged, along with oil, on escalating conflict in the Middle East after US-Israeli attacks on Iran over the weekend. The bout of risk aversion, which eased in many markets on Wednesday, had sent currencies from South Korea to Chile tanking, with benchmark gauges of developing world FX and stocks posting their worst day in years.

Still, those developments are more likely to influence near-term price actions than alter longer-term structural themes, Campbell said. DoubleLine’s strategies have minimal direct exposure to the Middle East and the firm has set up portfolios to be slightly less sensitive to interest-rate changes than the benchmark, he added.

The note follows Campbell’s previous warning about a “brewing collision” in some developed economies, where rising fiscal costs, weak growth prospects and mounting social pressures threaten to create a “vicious loop.”

By contrast, many emerging economies are better positioned on inflation and fiscal policy, and poised to deliver stronger growth into 2026, he wrote. Governments in several large developing nations have built more diversified domestic economies, broadened their investor bases and strengthened policy frameworks over decades of globalization.

Commodity exporters such as Chile, Peru and South Africa are positioned to benefit from rising global demand tied to infrastructure and defense spending in advanced economies. Their currencies have strengthened over the past year, with the Chilean peso gaining 5%, the Peruvian sol rising 8% and the South African rand climbing nearly 13%, according to data compiled by Bloomberg.

Campbell also highlighted attractive nominal carry and real yields in countries like Brazil and South Africa, where policymakers have anchored inflation expectations and contained political risks.

“Global investors have largely overlooked the gains in emerging markets,” he wrote. “More-astute investors can take advantage of an EM-DM convergence story.”

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