Emerging markets may rally as Brent nears $80; GSEE in focus

Brent crude slipped toward $80 this week after negotiators from the United States and Iran reported renewed progress and officials indicated the Strait of Hormuz would reopen. Those developments reduced the risk premium on Middle East supply and on maritime traffic through the strait.

Market participants had bid up crude during the period of disruption. The prospect of restored flows contributed to the recent pullback in prices.

Countries across the Asia-Pacific import most of their fuel. Thailand was among the first to be affected when the Strait of Hormuz closed, and several regional energy producers reported infrastructure damage during the disruptions. A resumption of normal shipping would alter the supply picture for these importers.

Exchange-traded funds that track emerging-market equities posted gains in recent months. The Goldman Sachs MarketBeta Emerging Markets Equity ETF (GSEE) returned 26.2% year-to-date prior to recent U.S. actions related to Venezuela and Iran and rose roughly 6.4% over the past month. GSEE tracks a market-cap-weighted index, charges 36 basis points and has concentrated weightings in China and South Korea. Taiwan Semiconductor Manufacturing Co. is the fund’s largest holding by weight.

Some investors increased allocations to foreign equities before the latest Middle East developments. Those allocation shifts, combined with lower oil-related risk, could affect flows into emerging-market equity products as energy import costs change.