Thanks to a topsy-turvy start to the year, driven by a combination of the new US administration’s unpredictable policies on trade and foreign relations, sticky inflation and the rise of geopolitical uncertainty and conflict, investors are broadening their horizons and reassessing how and where they should allocate their capital.

With the US representing close to 60% of world market cap and more than 70% of global developed market indices, attention is turning to areas which might offer better opportunities in terms of growth and value.

One area which has long been neglected, relatively speaking, is EM or emerging markets. However, since the turn of the year that has started to change. 

According to the AIC (Association of Investment Companies), global emerging market equities trusts recorded an average return of 11.4% against 7% for the investment trust universe as a whole.

Investment trusts focused on Chinese equities were among the best performers in the six months to June, with an average return of 14.6%, again comfortably above the average for the wider trust space.

Even emerging market debt, which is considered high-risk by most fixed income investors, is ‘showing signs of life, with fund flows rebounding sharply since the end of April and 2Q investment performance outpacing that of developed market fixed income indices,’ according to analysts at Jefferies.

As the analysts go on to point out, this resurgence ‘has been underpinned by a weakening US dollar, which, historically, has supported EM asset valuations and investor appetite for the asset class’.

 

A GROWING VOICE

As this month’s BRICS summit in Brazil demonstrated, emerging market countries are keen to represent a new front in what is becoming a ‘multipolar’ world.

The BRICS themselves, which have expanded significantly from their first summit in 2009 with the addition of more developing countries, now represent more than half the world’s population and 40% of its economic output, according to Reuters.

A joint statement released by the group said the tit-for-tat increase in tariffs sparked by the Trump administration threatened global trade, while forums such as the G7 and G20 appeared powerless to check the increase in protectionism.

Brazil’s president Lula da Silva drew parallels between the BRICS and the Non-Aligned Movement, a group of countries that refused to be formally aligned with either the US or the Soviet Union during the Cold War, adding: ‘If international governance does not reflect the new multipolar reality of the 21st century, it is up to BRICS to help bring it up to date.’

In a sign of the group’s growing importance on the global stage, Trump was moved to respond within hours, warning he would punish countries aligning themselves with the ‘anti-American policies’ of the BRICS with extra tariffs, as usual with no further clarification.

Against this backdrop, Shares took the opportunity to canvass opinion among fund managers as to why emerging markets had begun to outperform and why investors should think about allocating money to them.

 

‘THE STARS ARE ALIGNED’

‘The stars seem to be aligned’ for emerging markets, says Chris Tennant, who co-manages the £540 million Fidelity Emerging Markets (FEML) investment trust with Nick Price.

Tennant acknowledges a weaker US dollar has been an important driver for emerging markets this year, but argues it isn’t the only one.

‘Some easing of trade tensions, renewed focus on technological innovation, and relatively cheap valuations are some of the other reasons why emerging markets have outstripped the MSCI World Index so far this year.’

Tariff announcements have led to heightened volatility in equity markets, but Fidelity Emerging Markets has the ability to go both long and short stocks which helps it capitalise on sharp movements.

The trust has a bias towards small and mid caps, but it does invest in large caps, with South African tech company Naspers (NPN:JSE) and Taiwanese chipmaker TSMC (2330:TPE) being two of its biggest holdings, while in China the managers take an ‘active’ approach, shying away from banks, property and heavy industrials on concerns of oversupply.

Ayush Abhijeet, manager of Ashoka Whiteoak Emerging Markets (AWEM), also flags valuation as an important catalyst for the recent outperformance of EM stocks: ‘Emerging markets are undervalued compared to historical data, which is why countries like China have shown such strong performance in the last year.’

The trust has significant exposure to Chinese stocks, including top 10 positions in Alibaba (9988:HKG), Tencent (0700:HKG) and Hong Kong Exchanges and Clearing (90388:HKG).

Taiwanese chipmaker TSMC is also in the top 10 holdings, while Abhijeet says he is finding other attractive opportunities Taiwan as well as in India where he owns healthcare and industrial sectors in India like Hitachi Energy India (POWERINDIA:NSE).

Vera German, manager of the Schroder Emerging Markets Value Fund (BNV5M75), argues EM present ‘a compelling opportunity’ today, particularly through a disciplined value-investing lens.

‘In emerging markets, “value investing” is often associated with cyclical, state-owned enterprises in sectors like metals & mining or oil & gas. While these opportunities exist, deep value can take multiple forms such as fallen angels, cyclicals, special situations and companies with hidden growth,’ explains German.

Investors are too often swayed by prominent stories and strong narratives at the country or sector level, causing them to overlook exciting companies, says the manager.

‘We actively monitor companies which fall within our criteria and operate in regions or countries where investors aren’t looking, but where there are significant growth tailwinds for years to come.’

A prime example is telecoms company Airtel Africa (AAF), which operates in 14 African countries including Nigeria and Kenya and has grown its top line at around 20% consistently. This growth doesn’t even account for the substantial opportunities presented by mobile money and data centres, argues German.

Conversely, the fund eschews companies it thinks are expensive, even if they are considered ‘good quality’ businesses and large constituents in the benchmark, so one notable exception in the portfolio is TSMC.

 

THE CASE FOR LATIN AMERICA

Fidelity’s Price and Tennant are overweight Latin America, viewing Mexico and Brazil in particular as relative winners from US tariff policy and a future source of nearshoring for the US.

Specialist manager Sam Vecht, who runs BlackRock Latin American (BRLA), believes the waning belief in ‘US exceptionalism’ favours other regions, including Latin America.

 

‘Rising uncertainty around trade policy, governance and debt is prompting a repricing of US risk premia. While growth has remained resilient due to pandemic-era savings, those buffers are now exhausted, and sentiment is weakening.’

Key supports, such as government spending and immigration-driven labour supply, face challenges under a more hawkish Trump administration, says Vecht, leading investors to reassess US risk and the dollar’s safe haven status.

‘In our view, the world has entered a new geopolitical era defined by rising tensions between East and West, with a third bloc of politically neutral countries emerging in between.

‘This third group of politically neutral countries is well-positioned to benefit from the ongoing realignment of trade routes and supply chains,’ adds Vecht, almost echoing the BRICS statement.

Emerging markets have historically performed well during periods of lower interest rates and a weaker US dollar, as lower rates help foster growth while a softer US currency can boost exports, although there tends to be a high degree of dispersion.

Even China, which has borne the brunt of the tariffs, is an outperformer year-to-date, notes Vecht, as the expectation of government stimulus and domestic investor participation have buoyed the market.

‘People tend to overlook the fact that the China of 2025 is much better prepared and less reliant on US exports than the China of 2018,’ adds the manager.

While the trust sees opportunities across many countries, Latin America looks particularly well-positioned. Perhaps surprisingly, the MSCI EM Latin America index has outperformed broader emerging markets year-to-date by 14.6% as of the end of June, proving to be an unlikely defensive candidate in an increasingly volatile world.

Vecht believes increased geopolitical tension worldwide and the subsequent rewiring of global supply chains away from China is already benefitting a broader range of emerging markets, ranging from Indonesia to Mexico.

‘In Mexico for instance, despite some headline noise, we do not see a major change in the secular trend of nearshoring of supply chains, as Mexico will remain a much cheaper location to manufacture than the United States. (President) Sheinbaum’s pragmatic approach to trade negotiations underscores this view.’

The trust generated an NAV total return of 34.2% in US dollar terms in the five months to the end of May compared to a benchmark return of 22.4%.

The returns have been driven by strong stock selection within Brazil, which after a poor performance in 2024 due to fiscal issues and a weakening currency has bounced back significantly in 2025.

‘Our Mexico exposure has also been additive, with strong stock selection in the financials and materials space,’ says Vecht.

It is also worth noting the trust has the flexibility to invest in off-benchmark names, a good example being a Uruguayan fintech company which has been among the biggest contributors year-to-date.

 

A COMPELLING INCOME STORY

Isaac Thong, recently appointed lead manager of the £328 million Aberdeen Asian Income Fund (AAIF) alongside Eric Chan, highlights three reasons why emerging markets, and those in the Asia-Pacific region in particular, are well placed to meet the needs of income investors.

‘The region continues to lead global GDP growth, averaging 4% to 5% versus 1.5% to 2% in developed markets. For UK investors seeking diversification and long-term income opportunities, Asia offers a compelling blend of economic growth, innovation and market maturity,’ says Thong.

This stronger growth has spurred corporate governance reforms, with the Asia-Pacific region (ex-Japan) now contributing 31% of global dividends, on a par with the US.

Finally, dividend volatility is lower than in developed markets – even during Trump’s previous term, says Thong, MSCI Asia Pacific ex-Japan showed lower dividend volatility (1.14%) compared to the S&P 500 (10.15%), demonstrating its resilience.

Omar Negyal, manager of the £1.3 billion JPMorgan Global Emerging Markets Income Trust (JEMI), says he looks for a combination of value and quality, prioritising companies with good returns on equity, free cash flow and positive dividend policies.

‘We have identified Mexico, Indonesia and Korea as compelling markets, with a sector overweight in financials due to good returns on equity,’ says the manager.

‘Trade tariffs pose challenges, but opportunities exist to invest in companies with domestic revenue or by being selective among exporting countries, and a weaker dollar could be a tailwind.’

Negyal sees opportunities for shareholder returns to rise in Korea and China: ‘There have been corporate governance improvements in Korea, leading to increased shareholder engagement, higher payout ratios and more buybacks. Chinese companies are also improving shareholder returns by paying dividends and considering buybacks in response to slower growth. The return profile in China is shifting from growth-focused to a balance between dividends and growth.’

Chetan Sehgal, co-manager of the £1.9 billion Templeton Emerging Markets Investment Trust (TEM), believes in the long-term emerging markets as an asset class could offer up to 7% or 8% yields, although US trade tariffs are a risk to growth in the short term.

‘We are overweight Korea and Brazil, which have recovered after a tough period. At the same time, we have reduced our China exposure and added to our Indian holdings when the market sold off,’ reveals Seghal.

‘Our standout holdings, however, have been TSMC, where demand has been driven by the AI (artificial intelligence) boom, along with SK Hynix (000660:KRX).’

Looking ahead, Sehgal is keeping an eye on both the Middle East and Eastern Europe in the hope hostilities cease and opportunities open up again.

---

 

THE TARIFF ISSUE

Clearly there is no way round the thorny issue of tariffs, which could disproportionately impact certain emerging markets, but with lack of clarity on where the numbers might eventually land companies have no choice but to get on with the day-to-day running of their operations.

Trump’s baseline 10% tariff has already raised US revenue receipts, and looks certain to remain in place now that bond and equity markets have recovered their poise.

The ‘grace period’ on additional reciprocal tariffs was recently extended to 1 August, suggesting the US is still open to negotiations, while Japan, South Korea and Malaysia were sent letters confirming the rate which will apply to their exports would be roughly in line with the ‘Liberation Day’ proclamation.

However, in what is clearly a politically-motivated attack, and without any discussion, Trump has imposed a 50% tariff on goods from Brazil from 1 August, sending its currency and its stock market down.

Brazilian exports to the US are small in the grand scheme of things, but they are mostly food and agricultural products which are high-frequency purchases.

Given wholesalers typically hold a limited amount of inventory, US retailers will have no choice but to pass on the majority of the price increases which means consumers will feel the impact relatively quickly.

Coercing foreign companies to relocate factories to the US, which is one of Trump’s objectives, would entail years of planning and hundreds of billions of dollars of investment, and is simply not going to happen on any great scale before the end of his current term.

For now, tariffs haven’t had a measurable impact on inflation or employment, nor have they had an impact on corporate earnings, and forecasts for the second quarter have been lowered sufficiently that a ‘beat’ is almost certain.

As the months roll by, however, US consumers are going to experience a steady rise in prices, which could lead to higher-for-longer interest rates, a decline in real wages, a slowdown in consumption, a rise in unemployment or in a worst-case scenario a full-blown recession.

‹ Previous2025-07-17Next ›