Returns From Eurozone And Emerging Markets Bear The Brunt of US-Iran War
The relative regional returns for US markets have gone from negative of around 4% to +2%, clearly a role of reversal - Writes Krishnanand.
Published : March 28, 2026 at 2:49 PM IST
European equities and credit markets are likely to remain under pressure even if the Middle East conflict subsides in the coming weeks, as the region grapples with the economic fallout of higher energy prices and weaker growth prospects. The outbreak of the US-Israeli war with Iran has already triggered a sharp reversal in global equity performance, with US markets benefiting from safe-haven flows while Eurozone assets lag.
The Eurozone, which was once seen as recovering from the adverse impact of the Russia-Ukraine war earlier this year, is now being seen as increasingly vulnerable, particularly as it remains heavily dependent on imported energy.
"European equities and credit bear the brunt of disruption," said Cassidy Ainsworth-Grace, an economist at the London-based think tank Oxford Economics. She noted that even a near-term resolution of the kinetic phase of the US-Israel’s war on Iran is unlikely to reverse the structural pressures facing Europe.
As per a study conducted by Oxford Economics, the relative regional returns this year, as measured in US Dollars, are positive for the US equities after the outbreak of the US-Iran war, while for the Eurozone and Emerging Market equities, these returns have declined.
This was just the opposite until the war broke out. For example, before the war in the Gulf region, the relative regional returns, as measured in USD, were negative by nearly 4 percent for US equities, while for emerging markets they were estimated as 10 percent and for European markets, they were slightly less than 4 percent in positive.
However, after the outbreak of the US-Iran war, the relative regional returns for the US markets have gone from a negative of around 4 percent to plus two percent, clearly a role of reversal.
"Earlier this year, investors had been betting on a Eurozone recovery, but we think they're likely to be disappointed. With no recovery in sight, Eurozone equities appear relatively expensive,” Ainsworth-Grace, a Global Macro Strategist at Oxford Economics, said in her statement sent to ETV Bharat.
Europe’s heavy reliance on imported energy
The region’s reliance on natural gas imports leaves it exposed to supply shocks, especially as disruptions to Gulf energy flows push Asian buyers into global LNG markets, which is driving up energy prices in the world market.
With gas storage levels already low and limited alternatives—given the political constraints on Russian supply—Europe faces a more persistent and inflationary energy shock than in past disruptions.
According to Oxford Economics, one alternative for Eurozone countries is sourcing natural gas from Russia. Peak 2018-2019 Russian pipeline gas flows could cover up to 64 percent of annual imports. However, due to the ongoing conflict in Ukraine, this remains a politically unviable option.
This will become a bigger issue if the war continues through spring and European gas storage needs to be refilled. In Europe, gas storage levels are already at 25 percent, below the 25th percentile since 2011.
“We plan to fade any bounce that could occur if the kinetic war is resolved in the next week or two. We anticipate the reversal in regional performance to persist over the medium term, with the Middle East conflict having a lasting impact on Eurozone equities,” noted the economist.
Fundamental weakness in European economy
At the same time, weakening fundamentals are compounding the outlook for the Eurozone and Emerging Markets. Growth in the Eurozone was already fragile before the conflict, with subdued earnings, slowing manufacturing activity, and declining industrial output, particularly in Germany, a prominent industrial power house in Europe.
The energy shock is expected to further dampen consumer spending and corporate profitability, while forcing the European Central Bank to tighten policy despite stagnating growth.
“We anticipate European high-yield credit will continue to underperform,” Ainsworth-Grace said, pointing to rising borrowing costs, widening spreads, and increasing default risks.
US is benefitting as a net energy exporter
In contrast, the United States, as a net energy exporter entering the energy supply shock from a position of strength, is better placed to weather the crisis, highlighting the growing divergence between the two economies.
The outbreak of the US-Israeli war with Iran prompted a sharp reversal in regional equity market performance, with US equities outperforming amid safe-haven flows.
Why Eurozone is crucial for global economy
The Eurozone, comprising 20 countries that share the euro as a common currency, functions as one of the world’s largest integrated economic blocs. With a combined nominal GDP of roughly $15–16 trillion, it accounts for about 14–15 percent of global GDP, placing it alongside the United States and China as a central pillar of the global economy.
Despite representing only around 4 to 4.5 percent of the world’s population, having approximately 350 million people, the region’s economic weight reflects high productivity and advanced industrial base.
On a per capita basis, the Eurozone significantly outperforms the global average, with income levels of roughly USD 40,000–45,000 compared to about USD 13,000 worldwide.
Read More:
