As we approach 2025, the global economic landscape presents a multifaceted picture for emerging markets, with a mix of opportunities and challenges shaped by geopolitical tensions, policy uncertainties, and evolving market dynamics.
East Capital reported in December that emerging and frontier markets delivered strong returns of 12% in USD terms in 2024, supported by robust earnings growth and favourable valuations.
Taiwan led the way, benefiting from the AI boom, while China surprised with a 23.4% return in offshore equities. Meanwhile, Latin America faced setbacks from political instability, but specific stocks like WEG in Brazil significantly outperformed.
China showed resilience, with the government addressing systemic risks in housing and local debt. However, incremental policy measures have yet to resolve deep-rooted challenges.
India, despite a cyclical slowdown, remains poised for long-term growth, driven by favourable demographics and low corporate debt levels.
2025 Outlook and Key Themes
The year ahead is expected to bring steady economic growth and easing interest rates, providing a supportive backdrop for equities. Emerging markets are trading at a record 45% discount to the S&P 500, presenting attractive investment opportunities outside the United States.
East Capital highlights several investment themes for 2025:
- High Shareholder Returns: Chinese and Korean companies are prioritising buybacks, significantly boosting EPS. Examples include Qfin, with an annual yield of 12%, and Halyk Bank in Kazakhstan, offering over 20%.
- Global Electrification: The demand for transformers and renewable energy continues to rise. Companies like Hyundai Electric and WEG are well-positioned to benefit.
- Financial Inclusion: Emerging markets remain underbanked, presenting opportunities for fintech leaders such as Nubank in Brazil and Safaricom in Kenya.
- Sustainability: Recycling and water treatment firms, including Gravita and VA Tech Wabag, are poised for exceptional earnings growth amid regulatory tailwinds in India.
- Education and Health: Structural underpenetration in these sectors offers high-growth potential in markets such as India and China.
Meanwhile, JP Morgan predicts that 2025 will be characterised by higher dispersion across stocks, styles, sectors, and countries. Emerging market (EM) equities are likely to post small gains amid global policy uncertainties, a stronger dollar, and less room for monetary easing.
Luis Oganes, head of Global Macro Research at J.P. Morgan noted: “EM growth faces significant uncertainty in 2025, caught between two giants, China and the U.S., with policy changes in the latter potentially delivering a large negative supply shock that will have spillovers across EM."
China: Cautious Optimism
Chinese equity markets have demonstrated remarkable resilience, with MSCI China up 17% year-to-date in USD, outperforming the broader emerging market asset class and aligning with developed markets' performance.
This resilience comes in the face of deep-rooted structural issues affecting consumers and businesses.
The Chinese government has taken decisive action to address key economic challenges, particularly in the housing market and local government debt.
A notable development was the unveiling of a US$1.4 trillion (A$2.11 trillion) debt program in November 2024, aimed at swapping expensive off-balance sheet debt of local governments for longer-term, cheaper public loans.
However, structural challenges persist, including consumer and business confidence. The government's approach to addressing these issues has been incremental, focusing on the two main systemic risks: the housing market and local government debt.
The potential for increased tariffs under a new U.S. administration remains a concern for China. However, China's reduced dependence on U.S. exports (only 2.8% of GDP in 2023) may mitigate some of this risk.
India: Growth with Challenges
India has been a standout performer in emerging markets, outpacing the S&P 500 over various time periods. The country's economic boom has been driven by government capital expenditure and a surge in retail investor participation, with $60 billion of domestic inflows into the market year-to-date.
However, recent data suggests a cyclical slowdown, with GDP growth moderating to 5.4% in Q3 2024.
Despite this setback, the long-term structural growth story for India remains intact. Favourable demographics, stable governance, and historically low levels of corporate and bank debt position the country well for future growth.
India's relative insulation from global shocks, including potential U.S. tariffs, adds to its appeal. However, high valuations in certain sectors, particularly consumer stocks, warrant a cautious and active investment approach.
Taiwan: AI Powerhouse
Taiwan has emerged as a key player in the global artificial intelligence (AI) boom, largely due to the dominance of TSMC in advanced chip production. As the only company capable of producing Nvidia's cutting-edge chips, TSMC has positioned Taiwan as a pure-play AI exposure.
This trend is expected to continue, potentially driving increased allocation from global funds looking to broaden AI investments.
Frontier and Small Emerging Markets: Uncorrelated Growth Potential
Frontier markets are poised for continued growth in 2025, supported by improving macroeconomic conditions, easing inflation, and attractive equity valuations. These markets offer low correlations to developed and emerging markets, providing a buffer against global volatility.
Vietnam, in particular, is forecast to grow by 6.1% in 2025, driven by its integration into global supply chains and strategic trade agreements. The expected FTSE upgrade of its $200 billion stock market to emerging market status in Q1 2025 could increase liquidity and investor interest.
Investment Strategies and Outlooks
According to Business Standard's Market Outlook 2025, JP Morgan suggests that 2025 is set to be another year that calls for theme-driven opportunistic allocation to emerging markets as opposed to benchmark investing. They recommend using risk budgets to focus on idiosyncratic investment cases, with overweight ratings on India and South Africa, beta to U.S. exceptionalism (overweight Mexico), exposure to the AI trade (overweight Taiwan), and USD defensiveness (overweight UAE).
Morgan Stanley remains confident in the outlook for earnings in India, ASEAN (Malaysia, Singapore, and Indonesia), and South Africa versus Latin America overall. They lowered their base-case price target for MSCI EM from 1,160 to 1,100, implying essentially zero returns for the region.
Meanwhile, Julius Baer emphasises the importance of focusing on capital markets where the playing field is familiar and where the rules of the game are stable and known. They reiterate their view that store-of-value equity markets should profit, citing the U.S., Sweden, and Switzerland as preferred examples.
The Emerging Road Ahead
As we look forward into 2025, emerging markets present a diverse set of opportunities and challenges. While geopolitical tensions, policy uncertainties, and global economic headwinds persist, many of these markets offer attractive growth potential and valuation opportunities for discerning investors.
The key to success in this environment will likely be a selective, active approach that balances risk and reward across different regions and sectors.
Investors should remain vigilant of global developments, particularly potential changes in U.S. trade policies and their ripple effects on emerging economies.
At the same time, the ongoing digital transformation, led by AI and other technological advancements, continues to reshape industries and create new investment opportunities across the emerging market landscape. Taiwan's position as a pure-play AI exposure exemplifies this trend.
The disparate performances and outlooks across different emerging markets underscore the importance of a nuanced, country-specific approach to investing in these diverse economies.
Disclaimer: This article provides general information and does not constitute financial advice. Always consult a professional advisor before making investment decisions.
