Some investors are betting the good times are only just beginning for emerging markets as worries over the US economy boost the allure of the long-suffering asset class.
Fueling the shift are expectations that President Donald Trump’s tariff policies will weigh on US growth and force traders to look abroad, a wager that has portfolio managers scooping up everything from Latin American currencies to Eastern European bonds.
The moves have already sparked a run in EM equities, with a gauge set for its best first quarter since 2019. A weaker dollar has helped lift an index of developing currencies nearly 2% this year, while local bonds have also climbed.
“For the past few years, investors have piled into US assets and more-developed markets,” said Bob Michele, global head of fixed income at JPMorgan Asset Management. “Now, when you look at valuations, emerging markets look cheap.”
Emerging-market investors have seen their share of false dawns in the past decade, as surging US stocks left competitors in the dust time and again. More recently, the highest Treasury yields in decades gave investors little reason to venture outside the US and sparked a surge in the dollar that rattled currencies across the globe.
The current rally’s fate may well be tied to the trajectory of US growth. A tariff-induced cooling of the world’s largest economy that pulls down Treasury yields and the dollar would be ideal — provided it doesn’t snowball into a more pronounced slowdown that kills the market’s appetite for risk, investors said. Many are also counting on a massive boost in European spending and further stimulus in China to take up the slack if the US sputters.
Bullish investors also point out that the assets of many countries are inexpensive on various metrics, with developing-world stocks near their lowest level relative to the S&P 500 since the late 1980s. Net asset inflows into dedicated funds are yet to turn positive in 2025, and emerging markets are underrepresented in many portfolios following years of weak performance. That could give stocks, bonds and currencies room to rise if the shift accelerates.
“The end-of-US-exceptionalism-trade has a long way to run,” Ashmore Group analysts wrote earlier this month. “This asset allocation shift is likely to be a decade-long trend, considering the huge overexposure by global investors to US equities.”
