Quick recap

Investor sentiment towards EMs started strong in 2024. This was driven by expectations of robust infrastructure development, a technology boom, and a slowing US economy to offset China’s delayed recovery. However, as the year progressed, volatility increased. Investors scaled back rate-cut expectations and sought safe havens like the US dollar. The election of Donald Trump as US president in November further cast doubt on EM prospects.

Outlook 2025: headwinds and tailwinds

The consensus is that 2025 could be challenging for EMs, with trade, tariffs, and interest rates weighing on the outlook. US deregulation and tax cuts might strengthen the dollar, posing a challenge for EMs.

On the other hand, low EM equity ownership and attractive valuations offer the potential for positive surprises. EM central banks and governments have demonstrated robust fiscal and monetary discipline for over a decade. Healthy corporate and country debt levels have added to this resilience.

Meanwhile, some of Trump’s controversial campaign promises, including tariffs on all Chinese imports, have already materialised despite their potential negative impact on the US economy. At the time of writing, the US has implemented a 10% tariff (modest compared with the 60% he threatened during the election campaign) on all Chinese imports. The Chinese government has been quick to announce retaliatory tariffs of 10-15% on US energy and farm equipment, and possible export restrictions on critical minerals. China’s response was targeted rather than broad-brush, which may reduce the risk of the trade war spiralling. Negotiations are possible, although it’s unclear what sort of deal either side wants at this stage. It’s also unclear whether Trump’s threats are meant to re-order the global economy or simply gain concessions.

Elsewhere, the US’s 25% tariffs on Mexico and Canada were temporarily put on hold until early March. The pause came after leaders of both countries announced new border measures designed to stop the flow of illegal immigrants and fentanyl. This response is in line with our expectations that Trump principally sees non-China tariff threats as negotiating leverage.

That said, Trump’s tariff threats to other regions (including the EU), his comments since the inauguration and the announcement of an External Revenue Service (which, incidentally, already exists in the form of the Commerce Department and U.S. Customs and Border Protection) may also point towards a different rationale. Trump may also be attempting to use tariff revenue to offset the income lost due to his planned aggressive domestic tax cuts.

What about China?

History has shown that the ‘Trump tariffs are bad for China’ narrative is not the defining driver of returns in China. The direct impact of tariffs was relatively muted during the 2018 trade war. After the initial shock, Chinese markets rallied from the end of 2018 to mid-2021.

This rally faltered because of domestic factors – radical Covid policies, a regulatory crackdown, and property deleveraging – rather than tariffs. Furthermore, following the first Trump presidency, Chinese companies have developed other destinations for their exports, making them less exposed to tariffs. At the same time, China has also diversified its imports by deepening ties with Central Asian countries, for example.

Importantly, recent comments from the Chinese government suggest it will launch much-needed fiscal stimulus to boost consumption. This includes Xi Jinping’s December comments, stating that ‘more proactive’ macroeconomic measures were required.

Reasons to be positive

EMs are benefiting from favourable microeconomic trends. Historically, EM performance has been tied to the global investment cycle, with many companies producing tangible goods based in these regions. Now, a new global capital expenditure (capex) cycle - driven by technology, the 'green' transition, supply chain de-risking, and growing domestic demand - is creating opportunities for EM companies and bolstering their earnings growth.

Developments in Mexico, Brazil, India, and the Middle East are particularly encouraging. India stands out with robust economic growth, driven by infrastructure development, an early-stage private capex cycle, and a gradual recovery in rural consumption. All this is supported by business-friendly policies.

The Gulf states have remained relatively insulated from last year's EM challenges and regional conflicts. They benefit from US dollar pegs and strong company earnings growth. While sentiment on Mexico is negative, we believe markets have priced in a lot of the bad news. There are also numerous robust, well-run Mexican companies in which to invest. A potential inflationary effect may also limit the ability of the US to undermine trade with Mexico too severely.

There are some negatives. A few EM countries have made fiscal mistakes over the last few years. Nonetheless, these capital management errors are cyclical, masking important growing domestic economic resilience in many EM nations. This should raise the relevance of EMs as an asset class, increasing its ability to provide effective diversification for investors. Companies focused more on domestic consumption should do well in this environment.

How does this look in practice?

Throughout 2024, AI was a boon to many technology companies. The outlook is equally promising. One name to highlight is Taiwan-based Yageo Corporation, which stands to benefit substantially from the rise in high-powered computing. And then there is Alchip. It provides silicon design and manufacturing services, focused application-specific integrated circuit chips. These excel in executing specific functions as efficiently and quickly as possible.

Trump has made his feelings clear about climate change, as evidenced by his withdrawal from the Paris Climate Agreement. Nonetheless, the global energy transition is fully underway and continues to create compelling investment opportunities. Take Kazakh uranium miner National Atomic Company Kazatomprom (NACK). It mines around 20% of the world’s uranium at a lower cost than its peers. NACK’s position in the supply chain gives it distinct pricing power, while ongoing electricity demand for AI-related data centres should also drive future growth.

Lastly, we have Singapore-listed Capital India Trust Limited. This high-dividend-yield company should benefit from a shift in India’s commercial property cycle and a forward-looking investment into data centres.

Final thoughts…

The next four years could usher in an era of aggressive US exceptionalism. Tariffs, a strong US dollar and domestic-focused policies will pose challenges to EMs. However, we’re increasingly finding EM companies and countries deepening ties with each other. We’re also uncovering companies with resilient balance sheets, strong cash flow generation potential, and compelling valuation support that are not dependent on the US. Furthermore, structural tailwinds - in particular, increased capex - remain intact. So, despite the headlines, the EM opportunity remains alive and well. 

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.