A comprehensive overview of the development of Emerging Markets
Taiwan and Turkey stood out with strong price gains. Chinese equities, especially H-shares traded in Hong Kong, staged a strong recovery after several years of declining stock indices. Last year, they even outperformed the recently very strong US equities, while Chinese mainland equities did not increase quite as significantly. India's stock markets had a solid year, despite equity valuations that are already quite high. Latin America, and Brazil in particular, was an outlier. In addition to a below-average stock market performance, euro-based investors suffered considerable currency losses due to the very weak Brazilian Real. Despite the good stock price performance of many Emerging Markets last year, their downward trend in relative performance to the developed markets is still unchanged. However, this is largely due to the strong above-average price increases on the US stock markets, which in turn were mainly driven by a relatively small number of very large growth-companies.
Trump, tariffs, and the US dollar: Implications for Emerging Markets
2025 will be a particularly exciting year for Emerging Markets. The focus will be on the higher US tariffs on imports announced by the new US President Trump, particularly on Chinese products, and the question of how the US dollar will react to this development and to Trump's economic and fiscal policies. In the past, a strong US dollar usually posed a headwind for equity market performance in Emerging Markets, while a weak US dollar has provided a tailwind. The potential for a further appreciation of the dollar is likely to be quite limited following the surge in recent years, especially since the US currency is fundamentally already very expensive. However, a significant weakening does not appear to be an imminent prospect in the coming months, but it could happen later this year or in 2026.
Generally, we believe that
Specifically, countries such as Mexico, China, Taiwan, South Korea, Thailand, and Vietnam – which export large quantities to the US – could be severely affected by any new US import tariffs. In fact, shortly after taking office, President Trump announced that he would impose punitive tariffs of 25% on Mexican (and Canadian) products. However, he is known to use announcements as a means of exerting pressure. It is likely that foreign governments could negotiate deals with him and offer, for example, to import more American products in order to avert such tariffs.
Taiwan: Positive market outlook
We continue to take a clearly positive view of the Taiwanese equity market in the first half of 2025. The impressive performance of key companies such as Taiwan Semiconductor Manufacturing Company (TSMC), which reported a 57% increase in net profit in the fourth quarter of 2024, underscores the significant innovation potential of the Taiwanese economy. In addition, the new US administration under President Donald Trump continues to signal support for Taiwan and no significant headwinds from the US. The country is too important from a geopolitical perspective and as a leading producer of computer chips and AI components for the US to create any significant headwinds.
India: Cautious in the short term, still optimistic in the long term
India has been one of the strongest Asian stock markets in recent years. In the short term, however, we see a lot of positive things already priced into equity valuations. The average price-earnings ratio (P/E) in India is currently 24. That is a high level – especially compared to almost all other Emerging Markets. In the medium to long term, however, we remain optimistic about the Indian market, as the country has also implemented many structural reforms that will further support economic development. This is coupled with a continuing favorable demographic structure. The positive sentiment among the population and companies reinforces this confidence. We are currently experiencing a positive cycle in India that promotes both sustainability and prosperity – a promising mix for responsible investing.
China: Economic recovery despite Trump?
In addition to the monetary stimuli already announced, China could take fiscal measures to boost the economy. This is highly likely to happen if Trump imposes additional tariffs on Chinese products. Increased volatility on the Chinese stock markets is to be expected. From an operational point of view, the upcoming import tariffs are likely to play a subordinate role for most listed companies, as a large proportion of them have already largely adjusted to the tariffs introduced during the first Trump presidency.
Overall, we expect a U-shaped, gradual improvement in the Chinese economy, which should be supported by further fiscal policy measures. This strengthens our confidence in the market bottoming out, although we do not expect a strong recovery in the Chinese equity market in the short term. It will take time for the economy to fully stabilize.
What we look for in Chinese investments
When selecting individual stocks, we favor high-quality companies that are global market leaders and only partially dependent on the US market. We also favor Chinese internet companies with high positive cash flows that are less susceptible to macroeconomic fluctuations. In addition, we are focusing on stocks that benefit from special trading programs and on sectors that are in the Chinese government's focus, such as the localization of semiconductor production.
Emerging market equities and geopolitics
Escalating geopolitical tensions and conflicts have discouraged investment in Emerging Markets in recent years. If the easing of tensions in the Middle East is sustained and efforts to end the war in Ukraine are successful, the risk premiums for emerging market equities could fall noticeably, with a correspondingly positive effect on equity prices.
More about emerging market equity funds
Emerging market bonds: Still promising?
For Emerging Markets, the new US administration is increasing uncertainties in various areas, particularly in trade policy, which argues against a further significant decline in risk premiums (yield spreads) for emerging market bonds. Nevertheless, we expect a positive performance from emerging market hard currency bonds due to selectively attractive yield premiums and probable (moderately) declining US yields. On the local currency side, the rising global uncertainties, which limit the room for maneuver of emerging market central banks, are partially reflected, but in the coming months even better entry opportunities could arise. We favor countries with good growth potential, such as India and Indonesia, as well as those that should improve structurally, such as South Africa and Turkey. Brazil could also offer opportunities if a credible fiscal plan can be presented.
Emerging Markets: Opportunities and risks
Naturally, there are also a number of risks to this outlook. An overly relaxed fiscal policy in the US could lead to overheating and a renewed rise in inflation. This would drive up both the US dollar and US interest rates and would thus be negative for emerging market equities and bonds. It goes without saying that an ever-escalating trade conflict between the US and China would not be positive for the global economy and Emerging Markets. And while it is currently considered unlikely, a US recession also poses a risk that cannot be completely ruled out. Geopolitically, the conflict between Israel and Iran could cause upheaval.