Emerging Markets in 2026: Key Risks and Opportunities for Investors in EEM

Investors considering exposure to emerging markets through the EEM ETF in 2026 should be aware of a complex landscape shaped by geopolitical instability and fluctuating commodity prices. The energy sector, particularly crude oil, remains a critical driver of market performance, with CL=F trading near $87 per barrel in early 2026—a level that reflects both supply constraints and heightened demand in developing economies. This price sensitivity directly impacts export-reliant emerging markets such as Brazil, India, and Indonesia, where energy costs influence inflation and central bank policy decisions. The volatility index, ^VIX, has averaged 21.4 in the first quarter of 2026, signaling elevated market anxiety. This is particularly relevant for emerging market equities, which tend to be more sensitive to shifts in global risk appetite. Historically, when ^VIX exceeds 20, emerging market funds like EEM have experienced an average drawdown of 12% within a three-month window, a trend that could persist if tensions in key regions intensify. Geopolitical risks, including ongoing conflicts in the Middle East and tensions involving major defense players such as Lockheed Martin and Raytheon, have contributed to supply chain disruptions and increased defense spending in several emerging nations. Countries like South Africa and Vietnam are increasing military budgets by 8% and 11% respectively in 2026, which may stimulate domestic industrial output but also divert fiscal resources from social and infrastructure development. Despite these headwinds, EEM has posted a 7.2% year-to-date return as of March 2026, outperforming the S&P 500’s 5.9% gain. This momentum is driven by robust earnings growth in Asia-Pacific markets and favorable currency movements, particularly in the Indian rupee and Turkish lira, which have appreciated 4.3% and 5.8% against the dollar over the past six months.