Financial markets reacted to the recent surge in oil prices exactly as they have for the past 50 years – at least initially. Equities fell, bond yields rose, the currencies of energy importers weakened, and emerging market assets sold off.
But the traditional oil shock scenario proved short-lived. Emerging market (EM) local currency debt fell by nearly 6% – more than double the drop in developed markets (DM) – but rebounded by 4.2%, ending broadly in line with DM. EM hard currency debt proved more resilient, with a smaller initial drop and a stronger rebound, ultimately outperforming DM by around 2%. This performance is notable given EM’s usual sensitivity to rising risk aversion.
Historically, higher oil prices worsen the terms of trade for importing countries, push inflation higher, erode households’ real incomes and ultimately weigh on economic growth. Central banks in turn grow more hawkish, risk assets suffer and emerging markets would usually be among the first casualties.
This time, though, the situation is very different. The key distinguishing feature is that the world’s largest economies aren't retrenching but investing. And in large volumes. In the US, AI-related investment is growing by nearly 25% year-on-year, while US imports of capital goods are rising by more than 20%, despite a weaker consumer backdrop. China, also deeply engaged in the AI race, continues to expand its imports. Germany is investing in infrastructure, defence and the energy transition.
All this spending generates strong demand for exports from emerging market economies.
EM exports in demand
Korea, arguably, provides the clearest illustration. Traditionally, rising oil prices lead to a significant deterioration in its terms of trade and trade balance. In 2022, when oil prices surged following Russia’s invasion of Ukraine, Korea’s trade balance deteriorated by nearly 2.5% of GDP. This year, by contrast, it improved by more than 5% of GDP in just two months.
The reason is simple: the price of semiconductors now matters more for Korea than the price of oil. Demand for the chips to power data centres and AI infrastructure has more than offset the increase in energy costs. Korea’s terms of trade have improved by over 17% compared with a decline of almost 10% during the Ukraine-related energy shock (see Fig. 1).Year-on-year change for February to April in both cases Taiwan is on a similar trajectory – its trade surplus has increased by more than 2% of GDP, in contrast to the deterioration seen during the previous oil shock.
More broadly, 18 of the 22 emerging economies that have already reported April trade data are performing better than in 2022. And it is not just because of semiconductors.
The build-out of digital infrastructure and the electrification of the global economy are driving demand for materials that emerging nations extract and refine. Industrial metal prices have risen by more than 40% over the past year, a gain broadly comparable to that of oil itself. For emerging markets, this has been a bonanza: Chile, Peru, Mongolia and Zambia are benefiting from higher copper prices; Kazakhstan from uranium; Indonesia from nickel. Brazil, Malaysia and India are also enjoying the tailwinds.
Korea's terms of trade, rebased (100=2015)
Source: Pictet Asset Management, CEIC, LSEG. Data covering period 01.01.2014-01.05.2026. A higher reading indicates an improvement in the terms of trade.
Dollar’s diminishing power
Other dynamics are also shifting in favour of emerging markets. Previous oil shocks have been amplified by a sharp appreciation of the US dollar, magnifying the negative impact on economies with dollar-denominated debt.
But while the dollar remains overwhelmingly dominant as a payment and intermediation currency, the world is gradually becoming less dollar-centric. The dollar index appreciated by only 1.2% between February and May, compared with nearly 6% during the 2022 oil shock. Notably, the currencies of emerging market debtor countries declined by only 2.3% – less than a quarter of the depreciation seen during the last oil price spike in 2022.
The dollar’s ability to amplify shocks appears to be gradually diminishing as reserve holdings become more diversified and local financing markets are more developed.
Europe’s growing importance has also played a part. In previous oil shocks, higher energy prices typically translated into weaker European growth, particularly hurting Central and Eastern Europe. Today, German fiscal expansion, higher defence spending and large-scale infrastructure investment are creating a regional growth engine not seen in years. The Polish zloty, Czech koruna and Hungarian forint have therefore held up much better than during comparable episodes in the past.
The reduced pressure on emerging market currencies has helped limit the inflationary impact of the shock. Among the 23 emerging economies that have already published May data, inflation has increased by an average of 1.2 percentage points in 2026, compared with 3.2 percentage points during the 2022 episode, with 16 countries (around 70% of the sample) experiencing a more moderate increase this time.
Impact on inflation: Iran war vs Ukraine war
Source: Pictet Asset Management, CEIC, LSEG. Inflation in countries below the dash line was less affected by Iran war than the Ukraine war; countries above the line were more affected.
"Despite higher oil prices, emerging market assets remain in one of their most favourable environments since the early 2000s."
Stronger EM fundamentals
Finally, emerging markets themselves have changed.
In the 1990s and early 2000s, many of them had large current account deficits, substantial dollar-denominated debt and limited foreign exchange reserves. An oil shock was often enough to trigger severe financing crises.
Today, reserves are larger, external debt is lower, current account positions are stronger and central banks are more credible. Vulnerabilities have not disappeared, but they are materially smaller than they once were.
Of course, an oil price shock is still inflationary and negative for global growth. But its effects are now filtered through far more powerful structural forces.
AI is supporting technology exporters. The energy transition is supporting commodity producers. De-dollarisation is reducing part of the financial amplification mechanism. European investment programmes are strengthening key regions. And emerging economies are entering this shock with much stronger fundamentals than in previous decades.
Together these forces explain why, despite higher oil prices, emerging market assets remain in one of their most favourable environments since the early 2000s.
Investment insights
by Adriana Cristea, Senior Investment Manager, and Robert Simpson, Head of Emerging Markets Investment Strategy & Solutions (Fixed Income)
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The recentoil shock has reinforced rather than undermined the case for emerging market bonds.
Even before oil prices retraced towards pre-conflict levels, inflation data across emerging markets were already surprising to the downside, with the vast majority of May releases coming in below expectations. The subsequent decline in energy prices further reduces the risk of a persistent inflation shock, particularly in oil-importing economies, and supports external balances and growth. In contrast to previous oil spikes, inflation expectations have remained relatively well-anchored.
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Emerging market local currency bonds
For investors in emerging market local currency bonds this creates an attractive backdrop. Monetary policy across many emerging markets remains on the restrictive side, leaving real yields high by historical standards and providing a substantial carry cushion. Combined with improving inflation dynamics and stronger external positions, this means returns need not rely solely on a benign global economic backdrop.
The most attractive opportunities are in markets where carry is substantial, policy credibility is improving and country-specific reforms are supporting investor confidence. Overall, emerging market local currency bonds continue to offer a compelling combination of income, diversification and selective capital appreciation potential.
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Emerging market hard currency bonds
Emerging market hard currency bonds continue to perform strongly, driven by robust fundamentals and reduced exposure to shock. With yields still high relative to history, lower debt levels than the developed world and less economic risk, this represents a long-termstructural opportunity to capture excess returns.
The number of investible countries is growing, while credit ratings are improving. As such, emerging market hard currency debt represents a uniquely diversified asset class offering opportunities for secular outperformance.
