Given the tensions between China and the US under the last Donald Trump presidency, and the volatility this created within emerging markets, it’s little surprise some investors are concerned about the impact Trump 2.0 will have on the region.
Ahead of Trump’s entering the White House in January, there are fears that a protectionist trade policy will take a heavy toll. Year to date, investors in China have enjoyed strong returns with the MSCI China index up 16.6%, according to FE Fundinfo, while the MSCI Emerging Markets index has returned nearly 8%.
In this month’s head to head, Yoram Lustig of T. Rowe Price and JP Morgan’s John Citron debate whether the region continues to hold its appeal in the shadow of a second Trump term in office.
Yoram Lustig, head of multi-asset solutions, T. Rowe Price
Several factors warrant a cautious and selective approach to tactical positioning in emerging markets. Donald Trump’s return to the US presidency raises concerns about a protectionist trade policy, including tariffs. This could alter global trade dynamics, particularly with China and Mexico.
Increased tariffs on goods imported into the US are expected to raise costs for consumers and disrupt supply chains, leading to inflationary pressures and possible retaliatory measures from affected nations. This could hinder global economic growth, particularly for emerging markets.
Uncertainty around exact tariff measures may prompt preemptive actions from businesses, such as stockpiling goods or relocating manufacturing, contributing to financial instability in US trading partners within emerging markets.
Implementing tariffs and the deportation of immigrants in the US could further lead to rising inflation, causing the Federal Reserve to maintain higher interest rates, therefore strengthening the US dollar even more. US exceptionalism in growth and its haven status might provide another tailwind for the dollar. A robust dollar challenges emerging markets, possibly heightening inflation and slowing economic growth.
Developing countries often carry dollar-denominated debt, escalating the cost of servicing it as the dollar appreciates, straining public finances and corporate profitability. With investors shifting to higher-yielding US assets, capital outflows can result in local currency depreciation and reduced export competitiveness for emerging markets.
Proceed with caution
China’s recent stimulus measures have sparked optimism for a potential economic re-acceleration. However, these efforts are aimed at stabilising the economy amid disappointing data. The effort is centred on managing downside risks, with nothing on consumption or direct income support to address weakening consumers and a sluggish labour market.
Concerns remain about growth sustainability, as the property market’s downturn has undermined employment, household wealth and confidence. A faltering Chinese economy could decrease demand for commodities and services from emerging markets. When China sneezes, the rest of the world catches a cold.
Geopolitical tensions can escalate across regions like eastern Europe, the Middle East and the South China Sea, creating an unpredictable investment environment. The ongoing conflict between Russia and Ukraine exemplifies this instability. Countries perceived as less politically stable may struggle to attract investment, facing capital flight during periods of heightened geopolitical risk.
While current valuations of emerging market stockmarkets and currencies are attractive, valuations do not guarantee short-term performance. Sentiment can be influenced by macroeconomic and geopolitical factors, potentially overshadowing valuations in the near term and heightening volatility. Investors should exercise caution, not relying solely on valuation metrics without considering the broader context.
Emerging markets offer fertile ground for skilled active management, especially amid recent geopolitical and economic shifts. For instance, countries like Vietnam may gain from businesses seeking to avoid tariffs imposed on China by establishing manufacturing operations there. With competitive labour costs and the ability to leverage advancements in AI, markets such as India and South Korea are well-positioned to benefit.
As a result, 2025 may emerge as a year when selective investment strategies could generate attractive returns in emerging markets.
John Citron, investment manager, JP Morgan Emerging Markets Investment Trust
Emerging markets have long offered investors a compelling mix of diversification and growth potential. While recent headlines have centred on geopolitical challenges facing economies such as India and China, we think these markets are on the brink of a transformational period. With strong growth drivers, appealing valuations and untapped opportunities, they are poised to become a key focus for investors in 2025.
It has been a challenging few years for emerging markets, with pressures from a strong US dollar, supply-chain shifts and geopolitical tensions. However, the broader narrative remains optimistic. Structural factors such as favourable demographics, urbanisation and rapid digital adoption continue to underpin their long-term potential.
Historically, emerging markets have performed well in periods of easing interest rates and a weakening dollar – scenarios that could soon unfold. Combined with current valuations, emerging markets are well-positioned for a significant rebound in the coming years.
India’s economic momentum is impossible to ignore. Buoyed by a booming middle class, rapid urbanisation and an infrastructure renaissance, the country has solidified its position as a global IT leader while expanding into new sectors. For this reason, it remains one of the largest country overweights in the JPMorgan Emerging Markets Investment Trust.
Embrace the future
However, elevated valuations make selective investing crucial. Opportunities lie in infrastructure, digital adoption and consumer-driven industries, where growth potential remains robust. Investors must focus on companies with strong fundamentals and maintain a quality and value discipline.
China’s economic recovery remains fragmented with consumer confidence weak amid clear signs of consumers trading down as they digest lower prices in real-estate, a key store of wealth. Policy action finally seems to be broadening out with leaders calling to halt the real estate decline.
Valuations seem supportive, but earnings revisions remain negative. Government policies are more pro-growth and pro-business, and these stimulus measures are expected to deliver cumulative benefits into 2025. It seems there is a focus on underwriting a broader-based recovery rather than just on managing risks to growth.
Latin America offers a compelling diversification story. High interest rates have kept equity valuations in check, but anticipated rate cuts could act as a catalyst for growth. Sectors such as renewable energy, agriculture and commodities present upside potential.
In emerging Europe, the focus on renewable energy and digitalisation is driving innovation and attracting investment. While short-term volatility persists, the region’s long-term prospects are attractive.
Emerging markets on the whole are at the forefront of global digital transformation. With increasing internet penetration and accelerating adoption of artificial intelligence, countries like India and China are leading the charge. North Asia’s semiconductor supply chain remains pivotal, powering advancements in everything from AI to 5G.
Similarly, as the world moves towards sustainability, emerging markets are reaping the benefits. Renewable energy adoption is surging, supported by government policies and international investment. Markets aligned with global sustainability goals are particularly well-positioned to capitalise on this shift.
While the outlook for emerging markets in 2025 is optimistic, investors must remain mindful of potential risks. Geopolitical tensions, trade restrictions and currency fluctuations continue to pose challenges.
While election outcomes often have less impact on global markets than expected, we are closely monitoring fiscal spending plans and trade policies following the recent US election results. The full extent of tariffs may remain uncertain for several months, as some proposals await congressional approval.
By focusing on regions and sectors aligned with global megatrends – such as digitalisation, renewable energy and technological innovation – investors can unlock the potential of these dynamic markets.
As 2025 approaches, emerging markets are more than just a high-risk, high-reward investment– they are an essential component of any forward-thinking portfolio, for those investors ready to embrace the future.
This article was written for our sister title Portfolio Adviser’s December
