Emerging Markets Insights: Continued uncertainty appears to be the only certainty

Three things we are thinking about today

1. Tariff uncertainty: Tensions between the United States and China have resurfaced after an agreement in Geneva in May to temporarily lower tariffs and start negotiations on a mutually agreeable solution. The United States has accused China of withholding approval for the export of rare earths, and China has countered that the United States is not approving licences for the export of semiconductors and has cancelled visas for Chinese students. The bigger issue for investors is how China will respond in the long term to the US policy of containments toward China. Continued uncertainty appears to be the only certainty. 
2. Emerging market (EM) outperformance: Over the past 12 months, developed markets, as represented by the MSCI World Index, have outperformed EMs.¹ However, year-to-date the performance trends have reversed. The MSCI China Index has led the way on policy easing and a reversal of prior market pessimism. US dollar weakness has contributed to emerging market outperformance, as has attractive valuations. If these trends persist in the second half of 2025, we believe the outperformance could continue.
3. EM foreign exchange (FX) appreciation: The US dollar has been on a weakening trend year to date as the trade war and policy uncertainty has led foreign investors to question the sustainability of US exceptionalism. Asian currencies including the Thai baht and new Taiwan dollar have reached 12 months highs while the Brazilian real and Mexican peso have reached year-to-date highs. US dollar weakness is typically positive for EM equity and fixed income performance. However, we note that these historical relationships may break down in the future given the apparent decline in US exceptionalism. This will require investors to carefully monitor.
    

Outlook

Our Greater China Industrials research analyst recently visited the largest auto show in China, the Shanghai International Automobile Industry Exhibition. China’s auto shows are known for giving the rest of the world a sneak peak of Chinese innovation in the auto world. The world’s largest car market continues to show off China’s ability to innovate and react quickly to changes.

Intensifying competition leads to narrower disparity between leaders and followers

The most evident key takeaway from our Greater China Industrials analyst was the intensifying competition of all major original equipment manufacturers (OEMs) in every auto product segment across all price points. This comes even as the electric vehicle industry is facing a slowdown in sales growth globally. The depth of competition can also be seen by how other players are rapidly catching up to the leaders of each product category such as ultra-rapid charging and intelligent driving systems.

Leveling of the playing field

The high-profile launch of an automotive manufacturer’s advanced driver-assistance system (ADAS) earlier in 2025 opened to much fanfare. However, Chinese regulators are adopting a stricter approach on ADAS functions. OEMs are also banned from advocating their ADAS functions. This would benefit automotive players who do not currently have a comparable ADAS system, allowing them to play catch up gradually.

Pivot of marketing strategies

As such, a major automotive manufacturer seems to have abandoned their ADAS advertisements. The lack of marketing could create a lack of advantage for some players, thus putting all automotive manufacturers on the same starting point. The analyst noted that an automotive manufacturer has chosen to emphasise on a “safety buffer” from an ADAS instead and believes that consumers of higher-end segments may be willing to fork out more for the additional feature.

The acceleration of technological growth has presented both opportunities and challenges for investors. We intersperse this backdrop with our bottom-up approach to unearth companies which we think will benefit from the long-term growth drivers in the industry.

Market review: May 2025

EM equities rose in May 2025. Globally, equities rallied as the United States and China both wound back on reciprocal tariffs and dialed down significantly on levies for 90 days. US court rulings on tariffs—first a surprise ruling of an immediate block on tariffs, then a successful appeal to reinstate these levies—introduced more uncertainties. For the month, the MSCI EM Index returned 4.31% while the MSCI World Index rose by 5.95%.²

The emerging Asia region rose. Chinese equities gained on the more constructive approach to tariffs between China and the United States. China also released support measures and eased monetary policy; this included reducing its benchmark lending rates. Major state banks lowered deposit rates. This aims to stimulate consumption and loan growth. Our Chinese equity portfolio manager reiterates that the top brass of China is bent on stimulating the country’s economy, and regulators are working to execute. In India, the de-escalation of the India-Pakistan conflict sparked expectations that this conflict will fade without any lasting impact on the economy and markets. Accompanied by moderating inflation, it was overall a positive month for Indian equities.

The scaling back of US-China tariffs helped support semiconductor stocks globally, along with strong first-quarter 2025 results from the world’s leading AI chip supplier, accompanied by an optimistic outlook. The positive sentiment spilled over to semiconductor equities in South Korea and Taiwan. The Taiwanese dollar also experienced a sharp appreciation against the US dollar. South Korea’s government pledged to support the pharmaceutical industry against US tariffs, sending related stocks higher.

Equities in the emerging Europe, Middle East and Africa region rose. US President Donald Trump wrapped up his visit to the Middle East, which culminated in business agreements. This optimism boosted equities in the United Arab Emirates. However, falling oil prices  continued to pressure Saudi Arabian equities. In Turkey, the cessation of the Kurdistan Workers Party militant group in the country helped to limit losses of Turkish equities. This development could boost Turkey’s political and economic stability.

Equities in the emerging Latin America region gained. Brazil’s central bank raised interest rates, pushing borrowing costs to their highest level in nearly 20 years. Brazilian equities still managed to rally on expectations of foreign capital inflows. This contrasted with Mexico, where its central bank lowered its benchmark interest rate. Mexican equities rose on optimism as its president’s navigation through recent tariff tensions has resulted in minimal disruption from reciprocal tariffs.