Iran war exposes big market concentration risk. It isn’t in US stocks

Investors have poured money into emerging markets in recent years as the search for big stock gains has moved abroad and sought diversification beyond concentrated markets. S&P 500. But the US-Iran military conflict has reframed the concentration problem and underlined the level of risk in emerging markets when it comes to gains tied to a select number of stocks, many of which are tied to the AI ​​boom.

iShares MSCI Emerging Markets ETF (EEM) has performed strongly over the past few years and through 2026; It’s up 29% in 2025 and is still poised for a small gain this year. However, their assets are largely oriented towards Asia; It has large exposure to China, South Korea, India and Taiwan; together they represent more than three-quarters of the index weight and many of the largest tech-related stocks, including Taiwan Semiconductor and Samsung.

“If you look at the index in emerging markets, it’s still roughly 80% Asian,” Malcolm Dorson, senior vice president and emerging markets portfolio manager of ETF firm Global X’s active investment team, said on CNBC’s “ETF Edge” earlier this week. “That gives you too much concentration risk,” he said.

Overall, the EME index has a technology sector weight of over 30%.

South Korean stocks have experienced extreme volatility this week. The market had its worst single-day move ever on Wednesday as escalating war in the Middle East sparked concerns about energy supplies to Asia; Here, the biggest stocks in the memory sector fueling the AI ​​boom rely on energy-intensive processes. The South Korean index rebounded on Thursday from its worst day ever for its best day since 2008. iShares MSCI South Korea ETF (EWY) is still down nearly 13% this week.

Part of the tremendous volatility in South Korean stocks comes down to how well the stocks have performed recently and how many retail investors have made big gains by holding them. While SK Hynix, which is at the top of the emerging market indices, gained 274% in value last year, Samsung gained 125% in value.

The huge increase in oil prices since the outbreak of military conflict has shaken global markets. On Friday, Brent crude futures rose above $90 and U.S. West Texas Intermediate crude oil futures are approaching that range, up more than 30% this week, while Brent is up nearly 26%.

The energy shortage in Asian countries is due to China’s decision this week to domestic oil refining companies, stop all exports Energy market experts said fuel reductions and more Asian countries could follow similar moves to preserve their energy stocks.

This is not the time to abandon emerging markets, and some macroeconomic factors could sustain outperformance in these markets over the long term, according to ETF investment strategists. But Dorson said a “barbell approach” to investment strategy might be wise, balancing exposures across different types of emerging markets rather than sticking to a single region. Thinking this way, he says, should lead investors looking to maintain international visibility to look at Latin America as a counterbalance to Asian markets.

“I think you have to have both,” Dorson said.

He said countries such as Argentina, Brazil and Colombia are heavily dependent on the energy and commodity markets and rising oil prices could create an additional headwind for these economies. “I would say 25 to 33% of the story has to be the attractiveness of exposure to commodities,” he said. He added that there are also political reform efforts in Latin American countries that could be an additional source of wind for economies. “All eyes are on political change that could drive financial reform,” he said, adding that this could benefit financial services sector stocks across the region.

Stocks in many Latin American markets trade at significant discounts to U.S. stocks; many price-to-earnings ratios are about half that of the S&P 500. For example, Vanguard’s S&P 500 ETF, VOOCurrently trading with a P/E ratio of 28, the emerging markets ETF, VWOIt is trading at a P/E ratio of 18.

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