Despite the economic fallout from the Middle East crisis, capital flight into emerging and frontier markets has been minimal, a sign of relief for East Africa's capital markets.
Global rating agencies and economists say that external shocks arising from the ongoing Middle East conflict are in favor of emerging markets, as the resulting fiscal concerns, energy-driven inflation pressures and, in some cases, banking stresses are concentrated primarily in advanced economies, improving the relative position of many large emerging market sovereigns in global portfolios. There are many large emerging market sovereigns in global portfolios,” Moody's said in its latest update on the economic impact of the crisis on emerging and frontier economies.
Razia Khan, Standard Chartered Bank Plc's chief economist for Africa and the Middle East, said sustained outflows from emerging and frontier markets have not been seen since the U.S. and Israel launched attacks on Iran on Feb. 28, but investors may become more cautious over time. Must be seen,” Ms Khan said.
Shani Smit-Langton, a senior economist at Oxford Economics Africa, said foreign outflows from the Nairobi Securities Exchange (NSE) in the first quarter (January–March) were only partly due to the Middle East conflict. “The conflict certainly acted as a catalyst, triggering risk-off sentiment and causing global investors to pull back from frontier markets like Kenya in favor of safer, more liquid assets,” Ms Smit-Langton said.
The average foreign investor participation on the NSE declined by 4.73 percentage points to 32.27 per cent in the first three months of this year from the average of 37 per cent recorded in the previous quarter (October-December 2025).
The NSE All Share Index (NASI), however, rose 48.93 per cent to 194.82 points in the three months to March this year from 130.81 points in the same period of 2025, while the volume of shares traded rose 19.67 per cent to 1,886.19 million shares from 1,576.20 million shares in the same period.
Equity turnover doubled from Ksh26.27 billion ($203.64 million) to Ksh58.39 billion ($452.63 million). “Looking at the MSCI Emerging Markets Index, it looks like capital is moving back into EM (emerging markets) in a strong way,” said Jacques Nel, head of macro at Oxford Economics Africa. “The index declined sharply in late February and during March, but since the beginning of April, the index has been declining and is now above its mid-February peak.” “Of course, there are big differences between the markets, with the South African JSE All-Share still down year-to-date. Advanced economy markets are also bucking this struggle, with the Japanese Nikkei 225 up more than 15 percent this year, while U.S. stock markets are trending all-time high. Much of this stock performance can be attributed to the impact of investments in AI infrastructure, while the U.S. economy is still afloat despite higher gas prices. The pre-war began on February 28, when the US and Israel launched joint strikes on Iran after talks over Tehran's nuclear program failed, leading to an intense military confrontation.
Iran retaliated with attacks targeting US installations in the Middle East and Gulf Arab states, closing the Strait of Hormuz, disrupting global supply chains and sending oil prices above $100 a barrel.
The dollar has strengthened against emerging market and frontier market currencies since the war began, increasing the local currency cost of imported food, fuel and medicine in import-dependent economies. “Market pressures over this period have primarily been transmitted through yield adjustments rather than frequent sovereign credit revaluations or prolonged financing stress,” Moody's says.
According to Moody's, large emerging markets have demonstrated resilience to recent shocks, but to varying degrees, as relatively favorable external market conditions in the wake of recent shocks have helped emerging markets absorb persistent external shocks since 2020.
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