This outlook highlights key near- and long-term drivers shaping the landscape and underscores the strategic role EMs can play in diversified portfolios.
A trade deal between the US and China looks increasingly likely, potentially helping China emerge from its deflationary slump and encouraging consumer spending.
If such occurs, consumer discretionary companies are expected to perform well.
We remain optimistic about the Chinese technology sector, as advances in AI position China as a significant player. Large technology-driven companies are developing sophisticated models to leverage their extensive data pools and captive customer base.
See also: Asian markets brace for fallout from US tariff policies: Fidelity
Additionally, if the US dollar continues to weaken, dollar-sensitive countries like Brazil, South Africa and Indonesia are likely to perform well.
Outlook for 2H2025
A weaker dollar is a tailwind for emerging markets. If the dollar continues to soften, we expect markets to build on solid year-to-date returns. While tariff headlines will drive shortterm market movements, the trend towards lower levies should be positive.
See also: Central banks embrace gold and geopolitical hedging amid uncertain global outlook: UBS
As markets adjust to this new reality, company fundamentals will become increasingly important.
Global investors are likely to diversify away from the US due to a volatile policy environment, expensive equity markets and an overvalued dollar. This shift should benefit EM equities.
After correcting almost 20% from late 2024, some speculative excess from 2024 has been removed from the Indian markets. The Indian equity market has begun to recover in recent weeks, and as earnings bottom out in mid-2024, we expect to find attractive opportunities.
Indonesia has underperformed year-to-date despite robust economic growth. Both equities and the Indonesian rupiah appear undervalued on a longer-term basis, while economic policies are increasingly growth-friendly.
Timing any market recovery remains challenging, so we are currently focused on dividend-paying companies.
China faces disinflationary pressure and overcapacity in some industries. However, the housing market has stabilised, and the government is gradually applying stimulus. Companies are shifting their focus from topline growth to margin and return enhancement. We see opportunities for strong alpha generation, making stock selection critical.
A weak dollar and soft oil prices have weighed on the Saudi Arabian market, making it one of the worst performers year-to-date. We have been underweight in Saudi Arabia but remain vigilant for opportunities to add to high-quality companies in the region.
For more stories about where money flows, click here for Capital Section
We’ve just returned from a visit to companies in Brazil. The country is relatively insulated from tariffs, with US exports accounting for just 1.7% of its GDP, and it has deepened trade relations with Asia, particularly China, over the past decade.
Valuations remain appealing, and interest rates may be nearing their peak, though our focus remains firmly on company-specific opportunities.
China’s evolving role in emerging market portfolios
China remains a cornerstone of EM equity exposure, but its investment narrative is shifting. While beta opportunities are limited, there are significant opportunities for generating alpha.
A potential trade deal may offer short-term relief, but China’s longer-term strategy is centred on its Dual Circulation model, which aims to address structural imbalances in the economy.
Internal Circulation focuses on boosting domestic consumption, fostering innovation and enhancing self-reliance in critical sectors, creating new sources of demand that can only be met domestically.
Meanwhile, External Circulation seeks to maintain global trade engagement while reducing vulnerability to external shocks.
Despite ongoing macroeconomic and geopolitical challenges, China remains central to global growth themes such as AI, automation and electrification.
Its scale, efficiency and capacity for innovation make it too strategic to overlook. For international investors, limited exposure to China and emerging market technology risks means missing out on transformative, once-in-a-generation opportunities.
However, the implementation of the Dual Circulation strategy introduces policy uncertainty and execution risk amidst a challenging macro environment.
In this context, we believe a selective, active approach is essential. Only a narrow cohort of companies with durable competitive advantages and alignment with national priorities is likely to deliver sustainable long-term returns.
Our disciplined, bottom-up stock selection framework is designed to navigate these complexities while capturing the upside of China’s evolving growth story.
Emerging market equities in a multipolar world
As the global order transitions from US-led unipolarity to a more multipolar structure, the investment case for EM equities is undergoing a fundamental revaluation.
Historically, US exceptionalism has been anchored by three key pillars: technological dominance (Silicon Valley, Big Tech and a vibrant start-up ecosystem), financial leadership (the dollar’s reserve currency status and deep capital markets) and strategic alliances (Nato, Bretton Woods institutions and bilateral security pacts). Today, each of these pillars is being challenged.
Technological advances in Asia, the rise of alternative payment systems, de-dollarisation trends, and the growing influence of regional blocs such as BRICS are reshaping the global economic landscape.
In this evolving environment, Asia and broader EMs are emerging as structural beneficiaries. Key drivers include:
- Demographic advantage: Younger populations offer long-term potential to reshape labour markets and consumption patterns.
- Strategic reshoring and FDI: Supply chain diversification is accelerating foreign direct investment (FDI) into EM economies.
- Digital leapfrogging: High Internet penetration and mobile-first ecosystems are enabling rapid adoption of digital technologies.
With these dynamics, EM equities are increasingly being viewed not as a tactical or valuation-driven allocation but as a core component of long-term portfolios. The demographic advantages, strategic reshoring and rapid digital adoption in these markets present unique opportunities.
Investors who recognise and capitalise on these trends are likely to benefit from transformative growth opportunities in the years to come.
By integrating EM equities into their investment strategies, they can position themselves to harness the potential of these evolving markets and achieve sustainable longterm returns.
Derrick Irwin is a senior portfolio manager and co-head, intrinsic emerging markets equity at Allspring Global Investments and Gary Tan is a portfolio manager, intrinsic emerging markets equity at Allspring Global Investments
