Currencies, stocks and bonds in developing countries are defying US President Donald Trump’s trade war and the conflict in the Middle East to outperform global markets in 2025, after years in the shadow of a strong dollar.
A JPMorgan index of the local currency bonds of large emerging markets and an MSCI gauge of their shares have each gained around 10 per cent so far this year. In comparison, the MSCI World index, covering large stocks across 23 developed economies, is up 4.8 per cent, while the FTSE World Government Bond index is up 6.6 per cent.
Despite initial expectations that developing economies would be hit hardest by a global trade war, investors have warmed to these markets in recent months, as they look to diversify away from dollar assets amid concerns over erratic US policymaking.
“Suddenly, it makes emerging market local currency debt great again,” said Damien Buchet, chief investment officer of Principal Finisterre.
Investors are now returning to markets that had previously been very much out of favour and on lowly valuations, or offering attractive yields when adjusted for inflation. Emerging world assets have held their gains despite Israeli and US strikes on Iran, which have driven oil prices higher but so far caused limited fallout in broader financial markets.
Emerging market stocks have dropped to about 5 per cent of the assets under management in global equity funds, compared with nearly 8 per cent in 2017, according to JPMorgan analysts.
Even this year investors have still pulled about $22bn net out of emerging markets shares and bond funds overall, according to JPMorgan data. That largely reflects sums withdrawn in April, at the peak of concerns over the impact of US tariffs on global growth. However, a net $11bn came back in during May and June.
“Emerging market local currency assets had been underinvested for a number of years,” said Kevin Daly, co-head of CEEMEA economics at Goldman Sachs. “Even small inflows are having arguably disproportionately large effects.”
The interest rates of many countries in JPMorgan’s local bond index were now at their highest levels in two decades when adjusted for inflation, which was boosting the appeal of their bonds, said Grant Webster, a portfolio manager at Ninety One.
Emerging markets have also had a tailwind from a weak dollar, which has eased the pressure on their own currencies. That has given their central banks more room to cut borrowing costs to support economic growth, which has buoyed stocks and bonds, said analysts.
“As emerging market currencies strengthen, there’s more room for their central banks to cut,” said Nandini Ramakrishnan, emerging markets equities macro strategist at JPMorgan Asset Management, creating “a really good environment for equities”.
Performance has been also boosted by the growing attractiveness of Chinese technology and other emerging market sectors.
“China is leading in many tech spaces,” said Ramakrishnan, adding that “one of the long term structural trends globally is technology. Having access to that, not just from the Magnificent Seven [megacap tech stocks] in the US, is probably a good idea”.
“As a global investor, people are paying a lot more attention to the innovation and dominance coming out of China,” she added.
George Efstathopoulos, multi-asset portfolio manager at Fidelity International, said that “for the first time, I am not selling the rally in China. It’s challenging the US from an innovation perspective, from an equity market perspective.”
He added that almost 5 per cent of his portfolio was in Brazilian bonds. He was also bullish on Korea: “it has been very very cheap for a long time,” he said, adding that “we’ve got policy uncertainty behind us, we’re seeing bold measures coming through.”
The emerging market rally has also endured despite rising yields on US Treasuries, which traditionally would have drawn capital away from riskier markets and back to what has long been considered a safe asset.
A rise in US yields “has not had the negative effects you would expect for other risky assets — everything from equities to emerging markets local currency”, Daly said. “We have seen a breakdown in those correlations, and the question is why. What we appear to be seeing is an increase in the Treasury-specific risk premium.”
Growing concerns over the US budget deficit have come as worries over some emerging markets’ debt positions have eased.
Max Kettner, chief multi-asset strategist at HSBC, said the situation today was a “very different story to the 2010s, when it was mostly about . . . too much debt in the emerging markets. “Now, we have the same thing, but in developed markets.
“Previously I’m thinking: ‘I can’t buy South Africa, I can’t buy Brazil, because look at all of those fiscal concerns’,” he added. “But then I compare them to the US, to Japan . . . that fiscal concern argument no longer really holds, because we’ve got the same in developed markets.”