The Iran conflict has triggered a severe selloff in emerging markets, with stocks and bonds at record highs now under pressure. Asian markets have borne the brunt, with Korean stocks plummeting 18% this week. Global investors pulled $6.3 billion from Asian EM markets excluding China, putting the region on track for its largest weekly outflow in a month.

The twin shocks of higher oil prices and a stronger dollar are testing the investment case for EMs. Fund managers who had been building positions across Asia, Latin America and parts of EMEA now face risks from persistently higher energy costs. A Bloomberg dollar gauge rose 1.5% this week, pressuring currencies and raising debt-servicing costs across developing economies.

Investors are differentiating between oil importers and exporters. Countries like South Korea, Thailand and India face vulnerability, while Malaysia may be more resilient. India's rupee hit a record low, prompting central bank intervention. The EM benchmark index fell 4.4% Wednesday, nearing a technical correction, while Goldman Sachs notes geopolitical risk spikes typically have short-term negative effects.