Emerging Markets: Implications of the US-Israel attacks on Iran
12 March 2026
Here our expert emerging markets equities partner, Northcape Capital, shares their perspective on the US-Israel co-ordinated attacks on Iran that commenced on February 28, including their views on the potential implications for capital markets in the region, and importantly why Northcape has maintained zero exposure to the region since the inception of their emerging markets strategy in 2008.
This information has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Global Emerging Markets Fund.
US-Israel Attacks on Iran – Implications
Whilst still a big shock, on reflection the US attack on Iran should not have been too surprising, given the Trump administration’s substantial deployment of military hardware to the Middle East over January and February, a redux of the US placement of military assets to the Caribbean ahead of its Venezuela incursion to remove Nicolas Maduro in early January.
Stepping back, readers should note we have taken a view for many years now that the Middle East is inherently unstable, and vulnerable to large geopolitical shocks. Indeed, since its 2008 inception our strategy has not held a single stock in Saudi Arabia, UAE, Qatar, Kuwait, Egypt or even Türkiye. All these EM countries are ranked in our “Least Preferred” category, and as such we ascribe a very high cost of capital (20% plus) as the hurdle rate to invest in these markets. Frankly, with 20% plus discount rates, these EM capital markets are virtually impossible to invest in at current valuations.
A big part of the Middle East’s high-risk premium is poor governance and a lack of checks and balances on the autocratic authorities, high exposure to crude oil, and extremely volatile geopolitics in the region. We have also taken the view that Iran has become an increasingly dangerous ‘bad actor’ and has the potential to become quite combustible and very irrational, creating enormous collateral damage to the whole region. We first witnessed this with the 7 October 2023 attack by Hamas (Iranian proxy) on Israel, which ultimately led to the US-Israel joint attack on Iran on 28 February 2026. From here we cannot rule out the fact that Iran will do its best to undermine stability in the region for many years. We are seeing this now with its indiscriminate ballistic missile and drone attacks on both its friends and foes.
The US and Israel will undoubtedly halt their very costly military attacks at some stage. The pressure on the White House of mid-term elections, high oil prices, falling stock and bond markets, higher inflation, prospects of no Fed rate cuts, and ongoing pleas from Middle East countries to stop, will eventually see their Iran war project halted. Unless ‘boots on the ground’ are committed, we do not foresee regime change in Iran. In any case, committing substantial amounts of troops to hand-to-hand combat in the vast country of Iran with over 90 million people is both physically and politically very risky.
If you placed Iran over the US East Coast, it would swallow almost everything from Maine down to Florida. Further, the terrain of Iran is not only large, but also very rugged, and more crucially the government is driven by a zealot-like religious theology, not ideals based on western secular, liberal societies. Indeed, the new Iranian clerics now in charge understandably abhor these values even more post the recent bombardment and killing of their Supreme Leader, as such the Iranian Revolutionary Guard (IRG) will not go down without a fight to the death it would seem.
Consider Afghanistan: the ground invasion did not work after two decades of trying to cement regime change. And after an enormous loss of life and financial cost, an embarrassing pull out was the only option for the US, thus leaving Afghanistan for the Taliban – another theologically driven system. Iran is three times the land mass of Afghanistan and two times its population – there will be no political appetite for a large-scale land invasion by the US and Israel.
This leaves Iran to play the long game and potentially remain a disruptive threat within the Middle East for many years into the future, even if its military infrastructure is badly impaired today. Under this reality we see the US maintaining a big, costly garrison in the Middle East (protecting the Strait of Hormuz), whilst private foreign capital quietly drains out of the region, seeking safer jurisdictions. This will lead to a structural derating in asset values across the Middle East in the years ahead. Accordingly, we see no reason to commit capital to these markets, even with the temporary sugar hit of the higher oil price.
Clearly, the oil price is a concern. At the time of writing, Brent crude has shot up 40% in March to over US$90/bbl. The best hedge against this development is owning market leading companies with strong pricing power – an inherent characteristic of our EM portfolio. This enables the entities we own to pass on the higher input costs from oil and thus help protect profit margins and cashflows. However, we do believe if crude prices stay at these current high levels, alternate supplies will manifest (US shale for one), and demand will also reduce, leading to a gradual decline in oil prices over the medium term. This leaves the Middle East with the difficult prospect of not only the threat of ongoing conflicts, but also lower oil revenues, further draining investment from the region.
For more information, please contact us on 1300 927 254 or visit Warakirri Global Emerging Markets Fund.
The information in this document is published by Warakirri Asset Management Limited ABN 33 057 529 370 (Warakirri) AFSL 246782 and issued by Northcape Capital ABN 53 106 390 247 AFSL 281767 (Northcape) representing the Northcape’s view on a number of economic and market topics as at the date of this report. Any economic and market forecasts presented herein is for informational purposes as at the date of this report. There can be no assurance the forecast can be achieved. Furthermore, the information in this publication should only be used as general information and should not be taken as personal financial, economic, legal, accounting, or tax advice or recommendation as it does not take into account an individual’s objectives, personal financial situation or needs. You should form your own opinion on the information, and whether the information is suitable for your (or your clients) individual needs and aims as an investor. While the information in this publication has been prepared with all reasonable care, Warakirri and Northcape do not accept any responsibility or liability for any errors, omissions or misstatements however caused.
