On 2 April the new Trump administration effectively threw a lot of balls in the air with its tariffs announcement in the Rose Garden and markets are still working out exactly where everything will land.  

Emerging markets such as China, Vietnam, Taiwan and Indonesia and others were viewed the ‘worst offenders’ in president Trump’s eyes and, as a result, were hit the hardest while other developing economies like Brazil escaped with a 10% baseline tariff. These and reciprocal tariffs were meant to come into effect on 9 April. However, Trump decided on a 90-day reprieve which is due to end on 8 July.

Since then, Trump has given China its own 90-day reprieve (as of 12 May) and reduced China tariffs from 145% to 30% for this period. In response China has cut their US tariffs from 125% to 10% for 90-days to allow for further discussions. The 90-day reduction in US and China tariffs is due to end on 10 August.

With all these moving parts it is hard to get a sense of where emerging markets sit and whether they are still a worthwhile point of diversification in an investor’s portfolio. In this article we look at some of the long-run advantages enjoyed by emerging markets, what fund managers are seeing right now and the risks of investing in this area.

WHY EMERGING MARKETS?

Despite ongoing uncertainty there are still reasons people might be drawn to investing in emerging markets. From taking advantage of a potentially weaker dollar, long-term growth potential and cheaper valuations than developed markets.

According to Morningstar there have been €760 million net inflows into global emerging markets equity funds in March and €888 million in April this year and €35.1 million and €192.6 million net inflows into global emerging markets ex-China in March and April this year among European investors.

‘[It would be fair to say] that the current situation is dynamic and fluid,’ says Omar Negyal, co-manager of the JPMorgan Global Emerging Markets Income Trust (JEMI).

‘But emerging markets have long-term growth potential. If we look at some of our top 10 holdings we have been investing in companies from emerging markets countries Mexico, Indonesia and South Korea. Sectors we are overweight in within emerging markets include financials and technology.’

Dina Ting, head of global index portfolio management at Franklin Templeton ETFs believes the diversification provided by emerging markets is as relevant as ever. She says: ‘Increasing portfolio diversification appears more critical given ongoing uncertainty around the scope and implementation of US trade policy.’

Ting adds: ‘With a greater emphasis on global trade negotiations, investors are shifting toward more tactical, country-specific strategies to amplify exposure in economies better able to weather tariff upheaval.’

A few emerging markets such as Brazil have seen minimal direct costs of Trump’s recent tariffs policy. The Latin America region in general sits at the low end of the tariff spectrum with all countries at 10% rate. While Brazil still faces the challenge of taming its high public debt, its economy was strong and unemployment low throughout 2024 says Ting.

Soybeans remain a pivotal crop in Brazil’s agricultural expansion, driving the country’s rise as a leading global supplier of farm products, but a recent shift has seen Brazil’s cotton exports surpass those of the US.

A problem for investors who might want to take a selective approach to emerging markets is there are only a handful of products available which offer exposure to individual countries and the lack of diversification might be an issue. However, it could be an argument for considering active management when it comes to any emerging markets holdings in your portfolio rather than passive products which simply track a broad-based emerging markets index.

DOLLAR WEAKNESS IS HELPFUL

A weaker US dollar can attract more inflows to emerging markets as investors look for higher returns in a depreciating-dollar environment. Emerging markets debt repayments are often denominated in dollars so they can benefit when the US dollar is weaker.

Craig Martin, chair of Dynam Capital, the manager of the Vietnam Holding Investment Trust (VNH), said in recent weeks and months there has been talk of weaker US dollar, and an intent to lower interest rates in developed markets, adding ‘this would bode well for emerging market currencies, and equity markets.

‘The advantages of investing in markets such as Vietnam, or other emerging markets is of course a diversification from the US, and the growth these emerging markets offer. As the world grapples with the changing globalisation trends, some countries are looking to diversify their economies and trading partners.

‘Some, such as Vietnam, are looking to invest in domestic infrastructure to enhance their economic growth. Vietnam has already been growing at around 6.5% per annum over the past 30 years, and the country hopes to accelerate this further.’

A DEMOGRAPHIC DIVIDEND AND ATTRACTIVE VALUATIONS

Another benefit of investing in emerging markets is their younger populations compared to developed markets. By 2050, almost 28% of the population in developed markets will be over 65 years old compared to only 15% in emerging markets, according to GAM investment management.

This dynamic, when combined with urbanisation and a burgeoning middle class can also support consumption and growth.

From a valuation perspective emerging markets are trading at a wide discount to their developed market counterparts. The chart showing the 12-month forecast price to earnings ratios for the MSCI World versus MSCI Emerging Markets – demonstrates this. According to Shares analysis of the underlying data, the average discount MSCI Emerging Markets has endured relative to the MSCI World over the last 35 years is 22.1% compared with 34.5% today.

In terms of specific markets, according to Chris Tennant, portfolio manager at Fidelity Emerging Markets Limited (FEML): ‘Mexico has derated considerably over the last few years around fears of US protectionism and more recently a weak US economy, but I think a lot of those fears are unjustified if you take a longer-term view, offering up interesting opportunities from a valuation perspective.’

South Korea is another emerging market country which looks attractive according to Pauline Ng, manager at JPMorgan Asia Growth & Income (JAGI) along with Robert Lloyd.

The trust has a 12.2% allocation to South Korea and has been one of the worst performing markets for a while now making its valuation extremely attractive says Ng.

After the presidential election on 3 June putting behind the recent political turbulence in the country, Ng believes the country will be heading in the right direction with its corporate value up programme.

DISADVANTAGES OF EMERGING MARKETS INVESTING

There are some general disadvantages of investing in emerging markets like currency volatility, political instability, and weaker corporate governance.

China also makes up a large proportion of the MSCI Emerging Markets index at nearly 30% (29.57% as of 30 April) overshadowing other emerging markets countries. While Chinese shares may have some value appeal there are concerns about governance and about geopolitical risks.

Jorry Nøddekær, manager at Polar Capital Emerging Market Stars (BFMFDG4) maintains an underweight position in China (26% versus 30%) and is highly selective with his exposure.

Finally, China’s population growth was, for decades restricted through a one-child policy which was later relaxed in 2015 and in 2021. This means it does not have the same demographic advantages as other developing countries and has a population which is ageing in much the same way as in Western countries.

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