The outlook for emerging markets in 2025 is set to be something of a tempest.
In fact, one narrative presents the developing world on the edge of a financial storm. This is based on Donald Trump’s return to the White House, which is helping to fuel a considerable dollar rally that could wreak havoc on emerging economies. The signs are that this is already taking hold.
This outlook is the view of Nigel Green, chief executive of DeVere, an independent asset manager. “As the dollar strengthens on the back of looming Trump policies on Chinese imports, economies across Asia, Latin America and beyond are staring down a wave of currency devaluations, inflation spikes and economic instability,” he says.
“Investors are already seeing echoes of 2016. But this time, the stakes are even higher.” In addition, Trump’s renewed America First agenda means that he intends to slap tariffs on exports from Cananda and Mexico. However, the cost of goods arriving from China could reach as high as an unprecedented 60%.
“Such heavy-duty tariffs would likely trigger a dramatic plunge in the renminbi, with devastating ripple effects across emerging markets,” Green said. “When China’s currency falls, it drags down other emerging market currencies with it, creating a domino effect of depreciations across the developing world.”
For dollar-pegged economies like Argentina, Egypt and Turkey, the fallout could be particularly catastrophic, as they face the risk of explosive devaluations, uncontrollable inflation and the threat of full-blown financial crises, Green says.
As the dollar continues its upward trajectory, emerging markets are bearing the brunt of this shift. With most global trade priced in dollars, these economies face rising costs for imports, rocketing inflation and an increased burden on their dollar-denominated debt.
“The challenge isn’t limited to just one region,” Green adds. “Asian economies, Latin America and African markets alike are vulnerable to currency plunges, infation hikes and investor fight if the dollar surge continues unabated.”
For commodity-exporting nations, a stronger dollar also spells weaker global demand, pushing commodity prices down and squeezing their economies even further.
This scenario threatens everything from growth rates to employment stability across these markets.
“Investors looking to emerging markets for growth may soon find themselves dealing with a drastically altered investment landscape as the dollar steamrolls through these fragile economies,” Green says.
Beyond currency
The effects of a dollar surge go beyond just currency devaluations. Local currency debt markets in emerging economies are facing mounting pressure as interest rates climb, driven by the global scramble to keep up with the appreciating dollar.
“As borrowing costs soar, these countries will be forced to choose between defending their currencies and sustaining growth – a dilemma that has the potential to destabilise economies in the process,” Green adds. “Without flexible exchange rates, these countries may see their economies hit hard by tightening financial conditions that they can no longer control.”
But with all this volatility comes opportunity. “The next chapter of this economic story is starting, and for those [who are] pre- pared, it holds remarkable potential,” Green says. “A well-positioned portfolio could leverage these shifts, unlocking new gains in a world where the dollar dictates the rules.”
Going for growth
In a similar way, Rob Brewis, who manages the Aubrey Global Emerging Markets fund, has identified a number of opportunities in emerging markets. But his analysis is based on those poised for long-term growth, particularly in regions such as India, southeast Asia and Brazil.
For example, as China’s economy slows down, Brewis is noticing the potential for markets focused on renewable energy and consumer growth to outperform, avoiding the commodity-driven cycles of the past.
“There are clear signs that emerging market growth is opening the gap with developed markets once again, but this time led by India, a few countries in southeast Asia and Brazil – but not China,” he says.
At the start of 2024, Brewis says he was looking for lower interest rates to be a real driver for emerging markets, particularly countries with high real rates and where inflation was no longer an issue.
“This should still be a positive trend as the Fed begins its rate-cutting cycle,” he says. “But the waters have been muddied by a few central banks taking a particularly hawkish stance, such as Indonesia and Brazil.”
One key difference in this cycle is that Brewis doesn’t expect this heightened growth to result in higher commodity prices. In fact, he expects the reverse.
How, and why, can he make such a claim?
The first reason, he says, is China’s vast industrial complex, which built millions of apartments and the infrastructure to go with it, is now operating at a fraction of its capacity. And not surprisingly, venting its excesses on the world – note the pain on the global steel and auto industries, to name but two.
The second factor is the rapid transformation of the energy supply. Thirdly, is the removal of Covid-induced global monetary excesses by central banks across the world.
It is worth noting, Brewis says, how all the shortages we were worried about a couple years ago – gas, lithium, nickel and wheat, to name a few – have suddenly become significant excesses. “Only the cartelised world of oil is holding up, but there are cracks appearing there as well,” he says.
So, who benefits from all this? “Well, without sounding like a broken record, of course, its India. But not just India,” Brewis says. “Many other emerging markets are energy importers in sunny parts of the world that are well suited for localised solar power supplied by ever cheaper Chinese goods.”
Furthermore, Brewis says, look at how quickly South Africa has turned around a dire power situation just by letting the private sector loose on solar panels. “India, too, will never have to build the coal infrastructure that China did during its development phase,” he adds.
This not only benefits countries like India by improving their external accounts but it also helps the consumers as lower food and fuel prices feed into their improved real incomes.
“So potentially, that means growth can continue at a higher rate, and finally, we might see some persistent outperformance from emerging markets,” Brewis says.
Brazilian boost
Expectations are also high that Brazil will experience a real economic boost ahead of and into 2027, having won the bid to host the FIFA Women’s World Cup that year – a first not only for Brazil, but for South America, too.
“Over the near term, we believe investors should stay attuned to the opportunities in Brazil and may find what we consider an attractive entry point into this large and diverse market,” says Dina Ting, head of global index portfolio management at Franklin Templeton.
“The Brazilian market is trading at valuations that we consider favourable,” Ting says. “Improved conditions in Brazil’s manufacturing sector have been driven by a resurgence in production, stronger job creation and a pick-up in sales growth, according to S&P Global.”
Another significant factor in the appeal of Brazil is that since Luiz Inácio Lula da Silva took up his third uninterrupted term as president at the beginning of 2023, he has spent a great deal of time abroad to improve his country’s global image.
His efforts seem to be paying off. A survey by think tank Pew Research found that most Brazilian adults are optimistic about their country’s status as an international power.
In addition to the G20, Brazil is also set to host other high-profile events such as the UN Climate Change Conference (Cop 30) and the Brics summit of Brazil, Russia, India, China and South Africa in 2025, while also seeking membership of the Organisation for Economic Co-operation and Development (OECD).
In the almost three years since Brazil initiated its formal accession process for OECD membership, the country has achieved many milestones on the road to a power-player goal.
“If successful, Brazil would be in a unique position to influence the increasing geopolitical and economic competition between industrialised and developing countries, as it is the only country to be represented in the Brics, the G20 and the OECD simultaneously,” Ting says.
In this way, as the eighth largest economy in the world and the largest economy in Latin America, Brazil could well be a strong link in the global discourse on key issues for the Global South, which essentially comprises Africa, Latin America, the Caribbean, Asia excluding Israel, Japan and South Korea, and Oceania outside of Australia and New Zealand.
Risk immunity
Ting, like Brewis, also lists India as having much potential. “India investors are finding the subcontinent – which has already overtaken China as the world’s most populous nation – appealing for its relative immunity to global risks, given its domestic-driven economy,” Ting says. She cites that its younger labour force has also attracted a market pivot to this prime alternative to China manufacturing.
There are other factors contributing to the positive picture for India. Judging by India’s impressive initial public offering (IPO) environment, businesses there are feeling the optimism given the country’s 258 IPOs accounted for 30% of the global total by volume at the end of September and 12% by the amount of money raised. Putting this in context, this is in an economy that makes up just over 3% of global GDP.
It is also worth noting that in dollar terms, total returns for Indian stocks have improved by 93% during the past five years, compared with about a 24% rise overall for emerging markets and 5% contraction for China stocks over the same period, according to MSCI.
Although one theme keeps returning, that is inevitably an element of uncertainty around the policies of a second Trump term, which are still causing jitters around emerging markets, particularly in Asia, especially given the president-elect’s transactional approach to international relations.
And for Ting, China is the one for investors to avoid. The world’s second-largest economy seems braced for renewed friction over president-elect Donald Trump’s intention to reintroduce tariffs, and investor flows may be following similar tides as those of regional supply chain shifts – that is to say, diversifying from China and toward opportunities in markets such as India and Japan.
Adding to the country’s economic woes are societal changes like falling birthrates and a rapidly ageing population. Estimates by China’s National Health Com- mission suggest the country’s elderly population will exceed 400 million in the 2030s.
And even after China revealed the most aggressive stimulus package it has rolled out since Covid, China’s stock markets saw a short-lived rally at the end of September that ultimately fell at, raising questions about its status going forward. “A lack of detailed measures targeting consumption seems to have disappointed investors and led the bullish sentiment to de ate,” Ting says.
All of which raises a big question about whether China will be able to get its investment mojo back. What is therefore clear is that in 2025 emerging markets are set to have a tumultuous time on many levels. But for investors, it could be a time of opportunities.
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