Emerging markets surprise: positive development despite tariff headwinds

“The news of my death is greatly exaggerated” – this famous quote from Mark Twain can also be applied to the current situation in the emerging markets. Since the looming (or at least possible) election victory of Donald Trump in the US presidential elections last year, there has been noticeable pressure on growth forecasts in these regions. However, a look back at the year to date in the global emerging markets shows that the feared dip in growth has failed to materialize.

The year of tariffs

Memories of President Trump’s first term in office came back into focus, which was characterized by a comprehensive trade war with the most important industrial nations under the motto “America First”.

This issue was dealt with even more intensively by the Trump administration after he took office in January 2025 and de facto covered all countries worldwide with more or less high tariffs. Trade agreements or at least declarations of intent were subsequently concluded with some trading partners.

But even after “Liberation Day” on April 2, 2025, US tariff policy remained volatile, with recent threats of higher tariffs on pharmaceutical products and pasta from the European Union, among other things, and another threat of generally high tariffs on China.

Emerging markets surprisingly resilient to US trade policy

In macroeconomic terms, these tariffs were expected to act as a significant brake on growth in the emerging markets. As a result, GDP forecasts were adjusted downwards. Fortunately, however, the historian Eugen Rosenstock-Huessy’s quote that “announced revolutions do not take place” can be relied upon here.

Fortunately, the feared slump in growth did not materialize – on the contrary, the emerging markets proved to be remarkably resilient to the disadvantageous US tariff policy! The growth forecast for 2025 was recently revised significantly upwards.

There are currently several reasons given for this positive – yet surprising – development:

• Due to the threat of tariffs, purchases in the USA were brought forward in many cases. This led to correspondingly higher exports (and higher GDP) in the first quarter of 2025, particularly in Asia.

• The weaker US dollar since the beginning of the year has led to improved financing conditions in the emerging markets. Due to low inflation, the respective central banks were able to lower their key interest rates and thus support growth.

The improved financing conditions also resulted in lower defaults on high-yield corporate bonds in emerging markets. This refers to bonds issued by companies with a lower rating. These companies have a lower credit rating, which means that they also have a higher risk. In return, these bonds generally offer a higher interest rate.

At the end of September, 2.3% of bonds had defaulted this year, while the US investment bank JPMorgan expects an increase of 0.5% to a total of 2.8%. This is well below the previous annual forecast of 3.7% and the long-term average of 4.4%.

• The advantageous composition of exports in Asia must also be taken into account. The current AI boom and other technological developments are leading to strong demand for these products there. Also noteworthy in this context is the potentially sustainable production advantage that Chinese companies in particular have recently gained. As the NY Times recently reported, more robotics capacity has been installed in production in China in the past 5 years than in the rest of the world combined!

• The lower oil price (currently around 20% below the average for 2024) is also very positive for importing countries.

Emerging markets among the top performers

What is striking about the emerging markets, however, is the continuing difference between the emerging markets in Asia and Europe (with Latin America between these two poles).

The markets are also taking note of the positive development this year and have triggered a rally on the global emerging markets equity markets: since the beginning of the year, the MSCI EM – a global emerging markets equity index – has risen by around USD 1.5 billion. 24%. This is the highest annual increase since 2009. In comparison, the MSCI World, which tracks the performance of shares in global industrialized countries, has risen by 15% in the year to date. Emerging market bonds in local currency also recorded the highest price increase since 2016.

Conclusion

Despite the political uncertainties and the tightened US tariff policy, the feared negative effects on the emerging markets have so far failed to materialize. Even though growth in the global emerging markets is currently expected to be lower in 2026 than this year, the trend can still be described as clearly positive.

Above all, the resilience of this asset class to significantly negative external events allows us to look to the future with optimism. Investors can therefore remain optimistic about the emerging markets, as recent developments show that these regions offer opportunities even in challenging times.

 

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