Investment focus shifts towards burgeoning global markets
In the financial landscape of 2025, investor sentiment is shifting towards emerging markets (EM). The focus is on diversification, income, and long-term growth, as EM equities are gaining attention for their strong returns and improving economic fundamentals.
This renewed interest in EM equities is driven by a combination of factors. These include China's growth stimulus, the U.S. Federal Reserve (Fed) rate-cutting cycle, robust earnings growth in EM companies, and the weakening of the U.S. dollar.
China's accommodative monetary and fiscal policies, aimed at achieving a 5% GDP growth in 2025, are stimulating capital flows into EM equities. The ongoing global trade tensions have not deterred this economic expansion.
The Fed's anticipated rate cuts, expected to start in September 2025, create a favourable environment by lowering global financial conditions. This allows EM central banks to reduce their own rates, boosting domestic growth and equity markets.
EM companies continue to deliver earnings growth that outpaces developed markets, a trend that tends to correlate with EM equity outperformance periods. The weakening U.S. dollar, which has declined nearly 11% in early 2025, reduces currency headwinds and improves EM equity attractiveness for global investors.
EM equities entered 2025 with relatively low valuations, making them attractive to investors. This, combined with increasing investor inflows into EM exchange-traded products (ETPs), supports ongoing performance momentum.
Investors are being selective, leaning into income-generating strategies and quality-led approaches within emerging markets. Nearly half (49%) of survey respondents consider EM stocks undervalued, and approximately 37% of fund managers are overweight in EM equities.
The MSCI Emerging Markets index has risen 11.1% year-to-date to 6 August, outperforming the S&P 500's 1.7% gain. This performance is not limited to China, as EM equities offer a dividend yield of 2.75%, higher than the US market's 1.6%.
Fidelity International's Andrew Oxlade commented on the increased attractiveness of emerging markets due to the US dollar's decline, stating that investors are buying into the long-term growth story of emerging markets at a discount. This indicates a lower exposure of companies in the MSCI China index to US tariffs compared to other regions like Taiwan or Korea.
The US dollar's decline has contributed to the increased attractiveness of Emerging Market equities, as it supports capital flows, lowers debt-servicing costs, and lifts commodity prices. This shift in investor sentiment towards EM equities is expected to continue, offering opportunities for those seeking diversification and attractive returns.
Investors are increasingly focusing on emerging markets (EM) for diversification, income, and long-term growth, as they find EM equities attractive due to strong returns and improving economic fundamentals. The decline of the U.S. dollar, for instance, reduces currency headwinds and improves EM equity attractiveness, thereby encouraging global investors to invest in these markets.
The U.S. Federal Reserve's anticipated rate cuts in September 2025 create a favorable environment for investment in EM equities by lowering global financial conditions, allowing EM central banks to reduce their own rates, and boosting domestic growth and equity markets within EM countries.
