Emerging Markets Insights: Underowned, undervalued and underappreciated

Three things we are thinking about today

1. Emerging markets (EMs) outperformance: EMs have outperformed global equities¹ year-to-date, with a number of factors driving gains, including US dollar weakness, domestic demand opportunities and policy flexibility. EM equities have historically outperformed global equities during periods of US dollar weakness, and this cycle appears to be similar. The potential for growth in domestic demand to offset Trump tariffs also spurred interest in EM equities. In addition, the policy flexibility that EM governments have, in contrast to limited flexibility in developed markets, has also supported EM equities. Taken together, these factors support our view that EMs are underowned, undervalued and underappreciated.
2. ͏Tariff negotiations with China: Both China and the United States have a vested interest in entering negotiations to reduce tariffs on imports from each other. Signs of de-escalation are already emerging, with the United States exempting selected consumer electronics imported from China from tariffs, and China quietly removing tariffs on selected semiconductors, pharmaceuticals and aircraft engines imported from the United States. US Treasury Secretary Scott Bessent has described current China tariffs as “untenable,” and we believe it is likely only a matter of time before negotiations begin. Market moves seem to confirm this view, with the MSCI China Index up 9% year-to-date.²
3. Mexico moves closer to a deal: US President Trump has made it clear that he wants to renegotiate the United States-Mexico-Canada Agreement (USMCA), which he agreed to in his first term. Mexico’s president, Claudia Sheinbaum, has been quick to address US concerns, delivering a dramatic reduction in immigration and making progress on the flow of Fentanyl into the United States. The market seems to expect that the two countries and Canada will successfully renegotiate the USMCA and prevent a surge in tariffs, as reflected in the 20% gain in the MSCI Mexico Index year-to-date.³

Outlook

A group of five of our portfolio managers and research analysts attended a large-scale conference in Dubai, which is the world’s largest conference in the Middle East and North Africa (MENA) region. This coincided with the sudden drop in oil prices earlier in the month. The team met with 85 companies, leaving the conference with some positive takeaways amid external uncertainties.

It was largely business as usual for companies with a domestic tilt. In fact, although some companies that the group met with were monitoring external events, such as tariffs and geopolitical concerns, they were not currently changing their strategies. For these companies, any pressures in their respective sectors present an opportunity for smaller players to exit, while enabling other companies to expand their market share.

A conversation one of our portfolio managers had with the management teams of Saudi Arabian companies reiterated this trend. Saudi corporates are looking to partner with the Saudi Arabian government, or the country’s sovereign wealth fund, in government projects that are part of the Saudi Vision 2030 initiative. This initiative aims to diversify the economy and reduce dependence on oil. This collaboration spans various sectors, including infrastructure, energy, health care and technology, in the form of project awards or any other format, including public-private partnerships or joint ventures. While these partnerships have yet to happen, we sense that there may be opportunities for this to happen in the medium to long term. This means that Saudi Arabia can lean on the large corporations to pursue non-oil economic growth. Benefits also exist for these companies. For instance, an existing joint venture between a logistics and transportation company and a majority state-owned company has provided the former with a pipeline of projects and agreements, allowing for earnings visibility.

While the MENA region is generally known to be reliant on oil prices, several countries have already started diversifying their sources of economic growth. In the view of one of our MENA-based portfolio managers, Saudi Arabia stands to suffer the most from a consistent and long period of lower oil prices. However, our constant engagement with Saudi Arabia-based companies has unearthed what we consider positive complexities. We will continue to embark on this journey of deep, thoughtful dialogue that we believe should provide a balanced insight and help to shape our portfolios in this sea of uncertainty.

Market review: April 2025

EM equities rose in April 2025. Reactions to US tariffs announced on April 2, 2025, an event the Trump administration dubbed “Liberation Day,” differed. The US president lowered reciprocal tariffs to 10% for a 90-day period for countries that attempted to negotiate. Although most countries chose to embark on trade talks, China notably ramped up tariffs on its US imports. For the month, the MSCI EM Index returned 1.34%, while the MSCI World Index rose 0.94%.

The emerging Asia region rose. Chinese equities slid as the trade conflict between the world’s two largest economies continued to heat up, with both China and the United States placing tariffs on each other’s exports. Conflicting statements regarding US-China negotiations also highlighted the underlying tensions between both countries. Taiwan activated stock market mechanisms to ensure market stability—such as its stability fund and short-selling curbs—to reduce tariff-induced market turmoil.

South Korean equities managed to advance. The country announced an increase in its support package for the semiconductor industry to cope with heavier costs and launched a supplementary budget to support key industries. The country’s central bank also paused its easing cycle and kept its policy rate steady to stabilize the Korean won. The US announcement to delay auto tariffs, along with domestic bank action to lower savings interest rates, buoyed Indian equities. The central bank’s decision to reduce its policy repo rate synchronized with a drop in inflation. The Reserve Bank of India moved to inject liquidity into the financial sector, supporting banking stocks further. Our Asian equity portfolio manager believes that there is a high probably of of a de-escalation scenario in which the United States is likely to come to agreements with most countries, excluding China, on the reciprocal tariff rates in the next three months.

Equities in the emerging Europe, Middle East and Africa region rose. Oil prices sank amid escalating trade tensions and a surprise decision by some OPEC+ oil producers to boost output. This led to concerns over delayed progress in oil-producing nations’ economic reforms, such as Saudi Arabia and the United Arab Emirates. Turkey's central bank hiked its key interest rate 350 basis points to 46% in a surprise move that reversed an easing cycle. While this helped to provide some calm from March’s market turmoil, triggered by the arrest of Istanbul’s mayor, Turkish equities still ended the month lower.

Equities in the emerging Latin America region gained. Mexican equities soared as USMCA-compliant exports dodged the tariffs announced on Liberation Day. The possibility of a lower tariff on exports not covered by the USMCA also emerged. Falling interest rates also boosted Mexican equities. Brazilian equities also rose A the country commited to pursuing trade negotiations with the United States, while seeking to expand its network of trade agreements.