Mali Chivakul, emerging markets economist and strategist at Bank J. Safra Sarasin, sees a bifurcation emerging. “While the structural trend of a weaker US dollar remains intact, the pace of the US dollar depreciation in 2H2025 should be much slower than in 1H2025,” she says.
Chivakul, who spent years with the International Monetary Fund as an economist before joining the Swiss private bank, adds: “These flows are driven both by structural and tactical reasons. We expect that trend to continue in 2H2025.”
China: Waning stimulus and low margins
China’s first-half performance was underpinned by frontloaded fiscal stimulus and consumer subsidies. While these supported retail sales and the internet sector, the positive credit impulse appears to have peaked. Net income margins remain a drag on longer-term equity attractiveness.
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Chivakul notes: “We remain neutral on Chinese equities as we expect the payback to frontloaded policy support in the first half to be a drag on the market in the second half.” She adds that without a new policy catalyst, market upside appears limited. “The July Politburo (meeting) did not give any clear indication, and we therefore remain neutral,” she says.
From the bank’s view, the case for Chinese equities remains challenged by a lack of profitability. Net income margins are roughly half the level of the rest of the world, a result of fierce competition and an abundance of supply across sectors. “The long-term case for Chinese equities should become more compelling once a broader consolidation across various industries takes place and pricing power is reinstated,” says Chivakul.
India and Korea: Policy catalysts, but tariff risks
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India’s outlook remains complicated. The Reserve Bank of India surprised with a 50 basis points (bps) rate cut, and a solid monsoon season supports domestic consumption. Valuations have also normalised after running hot in 2024. However, the impact of rising US tariffs on trade and sentiment could weigh on investment momentum.
“The Indian market has been hit most recently with the threat of much higher US tariffs,” says Chivakul. In contrast, talks between the US and China are ongoing. “While the overall real impact is not large, the hit to sentiment is significant.” A possible 50% tariff on imports of Russian oil could disrupt India’s cost base and competitiveness.
Chivakul warns that this undermines its positive long-term outlook for India. She adds, however, that potential tax reforms to lower GST rates should more than compensate for the negative impact of tariffs. “The reform effort also sends a good signal to investors that India continues to adapt its policy to become more business-friendly. We continue to like India tactically.”
Korean equities, meanwhile, have surged 26% ytd, buoyed by President Lee Jae-Myung’s market-friendly reforms. These include amendments to corporate governance, tax code changes and support for crypto regulation. Coupled with a semiconductor rebound and a weak US dollar, these factors triggered sharp gains across fintech and payments sectors.
Chivakul sees limited near-term upside for Korea, though. She says: “In the near-term, it is difficult to see it outperforming in 2H2025. Still, the reforms that the government has undertaken to erase the ‘Korea discount’ should be beneficial to the equity market in the medium term.”
The government is supporting an amendment to the Commercial Act to improve the protection of minority shareholders’ rights. Moreover, the government has pushed for more investment in AI integration and a supplementary budget for 2025. The president has also pledged to allow crypto assets to be backed by the won, which has further lifted markets, with fintech names and payment services companies surging as a result.
Brazil: Banks drive gains, but commodity outlook dims
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Brazilian equities rose 23% in the first half, following a steep 35% fall in 2024, mainly due to investors’ fiscal concerns and a weakening real versus the US dollar. Surprisingly, the surge in Brazilian equities has happened in spite of oil and iron ore prices falling by 9.5% and 6.8% respectively in the first half. This has kept a lid on the performance of oil and mining companies.Banks have done the heavy lifting instead, carrying the Brazilian index higher.
Hence, the gap between valuation and profitability in the sector has closed, leaving further outperformance dependent on higher commodity prices — a scenario Bank J. Safra Sarasin views as unlikely.
“As the US cycle slows, it is difficult to see commodity price gains, which would be required for Brazilian equities to continue to outperform,” says Chivakul. A rebound in the second half would require a meaningful pickup in the global cycle, particularly from China and the US.
EM bonds and FX: Room for easing
With developed market central banks likely to hold steady, emerging markets are expected to continue easing policy through the remainder of 2025. “The growth slowdown and muted inflationary pressure in a weaker US dollar environment should allow EM central banks to cut their policy rate further to support domestic demand,” says Chivakul.
She adds that the combination of lower growth and inflation supports local currency bonds, which have returned 13% ytd. “EM local currency bonds are likely the segment within EM assets with the best risk-reward potential in the next six to 12 months.”
Chivakul adds that hard-currency EM bonds continue to trade at tight spreads, so the upside will mainly come from a further decline in US treasury yields. US long rates are, however, subject to other forces such as the medium-term fiscal worry, and may not be as sensitive to changes in economic conditions.
Still, currency appreciation is not expected to be uniform. While European currencies such as the euro have strengthened sharply, EM currencies have underperformed. Asian surplus currencies — including the Korean won, Malaysian ringgit, Taiwanese dollar and Thai baht — are likely to remain strong, although higher tariffs on electronics could pose a risk.
“The US dollar weakness does not translate into significant and uniform EM currency appreciation,” says Chivakul. “A stronger EM currency will add to the deflationary pressure that US tariffs bring. While this will make a good case for EM central banks to cut rates further, policy room varies across EM economies.” Outside Asia, the Brazilian real remains attractive due to its high carry and upside potential on a real effective basis.
Fundamentals to replace momentum
The second half of 2025 is likely to see a pause in the strong momentum-driven rally that characterised the first half. As global liquidity remains tight and the US dollar stabilises, fundamentals and not flows will dictate EM equity performance.
Chivakul notes that the factors behind outperformance are shifting. “The payback to the frontloading of exports in 1H2025 is one of the key risks across Asian EMs,” she says. “Exports from most Asean countries, for example, were growing at double digits in 1H2025. Now that the tariff dust has settled for most Asian EM, higher tariff rates starting in August will start to bite.”
The latest round of US trade measures, especially against key export items such as semiconductors and electronics, has created additional headwinds for Asia. These moves are expected to dampen external demand — a critical engine of growth for most EMs — while also adding deflationary pressure through currency appreciation.
“A stronger EM currency will add to the deflationary pressure that US tariffs bring,” says Chivakul. “While this will make a good case for EM central banks to cut rates further, policy room varies across EM economies.”
This divergence underscores a broader theme: while EMs as an asset class may benefit from structural shifts, such as investors diversifying away from US assets, performance in 2H2025 will hinge on country-specific policy credibility, reform momentum and relative exposure to trade friction. For instance, India’s vulnerability to tariff escalation on Russian oil imports could weigh on private investment sentiment and hamper the broader China+1 narrative that has previously supported inflows.
“India is currently importing about one-third of its crude oil from Russia, so it will take some time to wean off it,” says Chivakul. “While tariffs could be lower in the next six months, uncertainty about the outcome will depress private investment and could lower medium-term growth potential.”
Korea, by contrast, offers medium-term promise due to structural reforms despite near-term overbought signals. Brazil remains highly sensitive to global commodity prices and US monetary policy, making further equity upside conditional on an external demand rebound.
In fixed income, EM local currency bonds are likely to outperform given benign inflation, weak growth and monetary easing cycles across key markets. In contrast, hard currency EM debt offers limited upside, with spreads already tight and US Treasury yields subject to fiscal uncertainty.
Investor positioning is also less directional compared to previous cycles. After years of outflows, portfolio flows into EM assets have resumed, though more selectively. “We have already seen portfolio flows to EM picking up after many years of outflows. These flows are driven both by structural and tactical reasons,” adds Chivakul.
