Emerging-Market Rebounds Have Followed Setbacks
The 2025 US tariff proposals continue the policy path first started in 2018 during the first Trump administration. EM businesses were already alert to tariff dangers and have started to adjust their supply chains to mitigate potential disruptions. Meanwhile, EM investors have factored these risks into their decision-making, and much of the anticipated impact may have already been reflected in EM securities.
Consequently we think there could be the potential for a substantial rebound in EM investments if a high-tariff scenario recedes, especially as EM equities have outperformed developed-market peers after periods of extreme market volatility.
Stay Diversified, Beware Whipsaw
Given the backdrop of high uncertainty and volatility, overly tactical investors may expose themselves to the risk of whipsaw. We favor well-diversified, balanced portfolios, with equity holdings anchored in strong fundamentals and an emphasis on pricing power and defensive characteristics that can provide resilience against tariff pressures. For bond holdings, we advocate a bias to quality (for instance, overweight to EM sovereign rather than local currency debt).
Prepare for Different Scenarios
Meanwhile, we think investors should research potential winners and losers across a range of scenarios, in anticipation of more tariff clarity. For instance:
- In a renewed high-reciprocal-tariff scenario, winners would include countries and companies that are less affected by tariffs or benefit from import substitution. We see opportunities in Brazil’s consumer and financial sectors, and in China’s consumer cyclical companies, respectively. Losers would include big exporters to the US, especially in sectors deemed most important for US manufacturing success.
- Regarding a low-tariff outcome, recent price movements have already seen a rebound in many of the worst-hit companies and countries. Thorough research should help investors understand where prices have over- or under-adjusted.
- From a global reset perspective, losers could include companies in strategically important supply chains that are vulnerable to reshoring to the US. Countries and companies involved in avoiding US tariffs by trans-shipment through third countries (“origin washing”) could also be targeted for US penalties. By contrast, winners would be companies well positioned for the planned US manufacturing revival, including those already owning or planning US operations.
Emerging Markets Offer a Vast Range of Opportunities
The sheer scale of EM companies and countries coupled with inherent market inefficiencies creates a vast range of opportunities for active managers to discover pricing anomalies, both across and within asset classes. In fact, both the median fixed-income and equity active EM investment managers have outperformed their benchmarks in the longer term. Consequently we believe that EM should command a meaningful share of investors’ active fee budgets.
Similarly, EM may provide valuable portfolio diversification benefits during the volatile reset period. China A shares alone comprise around 5,000 stocks—a vast and less efficient market that has also exhibited some of the lowest correlations to developed markets (Display).
