The desk is optimistic about emerging markets (EM) and EM assets in H2-2025, as outlined by Standard Chartered's latest commentary. They highlight potential growth despite ongoing uncertainties surrounding trade policies and the US dollar. Per the full note source, the expectation is that specific EM regions will outperform developed markets, driven by favorable economic conditions and investment flows. This perspective aligns with our consensus target for the EUR/USD at 1.075, with a range between 1.04 and 1.12, suggesting a cautious yet positive outlook for the euro against the dollar.
What the desk is arguing
The desk argues that H2-2025 will present significant opportunities in emerging markets, particularly in regions like Africa and the Middle East. Per the full note source, Standard Chartered's analysts, Eric Robertsen and Razia Khan, emphasize that despite elevated uncertainty, there are identifiable 'bright spots' in EM assets that could yield attractive returns.
Supporting this view, the commentary suggests that favorable economic indicators and a potential pivot in global trade dynamics could enhance the attractiveness of EM investments. The desk notes that the current positioning in the FX market reflects a growing appetite for riskier assets, which could further bolster EM currencies.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
This view aligns closely with jpmorgan, which is positioned at the upper end of the consensus range, while bofa presents a more cautious stance at the lower end. The desk's call reflects a balanced outlook, leaning towards the potential for appreciation in the euro against the dollar.
How other firms see it
Firms like jpmorgan and citi share a similar optimistic outlook on EM assets, suggesting a consensus on the potential for growth in these markets. In contrast, bofa maintains a more conservative view, indicating concerns over global economic stability and its impact on EM currencies.
Key currency pairs to monitor include EUR/USD, which is influenced by the ECB's monetary policy, and USD/JPY, as shifts in US interest rates could have significant spillover effects on these markets.
What the calendar says
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stanchart
Hello, I'm Manisha Tank, welcoming you to this podcast from Standard Chartered featuring the best of the bank's research and analysis. In this episode, we discuss the economic outlook for the second half of 2025. This podcast is being recorded on July 15th.
The second half of 2025 report is called The Aftershock. It explores the outlook for the global economy amid elevated trade policy uncertainty. And while the outlook isn't entirely clear for the remainder of the year, the report highlights some bright spots, especially in emerging markets and what those mean for the EM currencies, particularly given the big question around the future of the US dollar.
Joining me from Standard Chartered, Eric Robertson, Global Head of Research and Chief Strategist, and also Razia Khan, Head of Research, Africa and the Middle East. 2025 will be very much a year of two halves. What does that actually mean? And further, what does that mean for DM versus EM economies?
What was interesting in the first half is that we had this period, albeit very brief, of what I would call inhuman volatility. We had the announcement of tariffs in early April. We had a VAR shock across asset classes, both DM and EM.
And then very quickly thereafter, we had the 90-day reprieve and economic uncertainty, financial market uncertainty all seemed to calm down very quickly. But as we all know, it was just a pause. In some ways, the good news is that we saw a lot of people taking what I would call preemptive action.
We saw businesses stocking up on inventories. We saw people readjusting their supply chains. We saw investors hedging their portfolios.
But the reality is that the can was kicked down the road. And now that we're into the second half of the year, now the nitty-gritty of tariffs and their implementation starts to come into effect. We have to start thinking about where the economic vulnerabilities are, where the economic opportunities are, and what that means for monetary policy and for investment and hedging.
This idea of the aftershock for us was that we had a first half of really extraordinary economic and financial market uncertainty. Now we think we're going to get more of that in the second half, but there are some very clear dividing lines that we've identified that appear very interesting to us. There are a number of fairly supportive factors for emerging economies.
We have lower oil prices, declining inflation, and the weaker dollar has also provided quite a bit of flexibility for EM central banks. On the more troubling side, we're seeing a resurgence of fiscal stimulus and fiscal stimulus expectations in DM, which is going to raise the prospect of more borrowing and therefore longer term interest rates moving higher. So there's a tension between EM and DM that we're watching very closely for the second half.
I saw this in the report, the big difference between the expected DM growth versus the expected average EM growth. Razia, can you just walk us through some of those bright spots? So despite all of the global uncertainty, despite expectations that after this very strong start to the year, maybe we'll see a slowdown as the tariffs have more impact, our full year forecasts for the Asia region still suggest growth of around 4.9%.
For Africa, we're looking at 4.1% growth in 2025. And for the Middle East region, benefiting from increased oil output now, we expect to see growth of 3.4%. And all of this is in contrast to our major developed market growth expectation of just 1.3%.
So although there are concerns that we may see many more downside risks to growth now, there are still regions of the global economy that may still manage to achieve pretty decent rates of growth overall. Eric, let's pick up on the currency question. You mentioned this in your scene setter.
How are EM currencies being affected by dollar weakness? And how are EM central banks managing inflation expectations when the backdrop is just so incredibly uncertain? And you're saying that there's more uncertainty to come.
I think that's right, Manisha. One of the real advantages for EM central banks from this period of currency strength that we've seen across most of EM and DM as well is that the normal pattern of economic uncertainty, EM currency weakness, and the risk of imported inflation is not there this time, right? We have declining inflation across a lot of EM.
We have stronger currencies, which makes a number of domestic factors more stable. And it gives EM central banks this policy flexibility that they wouldn't have in this kind of a business cycle. And so it's allowing them to ease monetary policy.
We've seen that already across a number of economies and we expect more to come in the second half of the year. And look, we're not naively optimistic here. We recognize that tariffs and trade uncertainty are a headwind to growth, especially for open and trade-dependent economies.
But the ability of central banks in those places to ease monetary policy as an offsetting factor I think is a real positive for the global economy in the second half of the year. The other way I would think about it is that for a number of economies in Asia especially, lower oil prices is a significant benefit for them. Not only does it help reduce inflation expectations, but it reduces the fiscal strain.
Many of these economies provide subsidies. The decline in oil prices takes a lot of pressure off fiscal budgets. And again, you have less pressure on the fiscal side and more flexibility on the monetary side and it's going to allow them to achieve a better monetary fiscal mix.
In a world where, as we've been arguing for probably a year now, for a number of these economies, their growth inflation combination is actually relatively benign. And so if they can ease monetary policy without the risk of capital outflows, then that's a huge positive for EM in an otherwise economically uncertain time. The numbers in the report around ASEAN were particularly interesting.
I also think that what's quite interesting would be the fallout of any tariff conversations between the United States and China, and then what the knock-on impact ends up being for the region. Do you see any of those areas as being risks to this scenario that you're presenting? Which seems very positive, but it does have its risks.
There are risks, but I would call them second-order risks. And what I mean by that is, if you look at the trade data, China continues to run its export machine at top gear. But what's interesting is that under the surface, export momentum to the US has declined significantly.
Offsetting that has been a big increase in exports to most of the emerging economy world. Now, in the short term, I think that's okay, but in the medium term, it raises attention that an increase in imports from China into EM economies is great for their consumers. They're getting an excess supply of goods at very attractive prices and very high quality, but EM corporates are starting to struggle under this competitive weight from China.
And we're starting to see some pushback from a number of companies in a variety of economies saying to their governments, look, we need to have a strategy for managing this influx of Chinese imports. It's hurting us from a competitive point of view. So I think that tension is going to keep coming up in the second half of the year.
And the other theme which the team has really been focused on is that in the short term, there may be enough demand from EM economies to absorb the supply of imports from China. But I think to suggest that EM can fully absorb all of the redirected exports that were originally meant for the US is probably a bridge too far. And so at some point, all of this excess capacity that's coming from China has to find a home, but at what price?
And I think that's the really big second order risk that we need to pay attention to in the second half of the year. Razia, I think what's really interesting story is what's emerging in Africa, because you've got a slightly more detached response when it comes to the impact of US tariffs, for example. Can you walk us through it?
Because there could perhaps be some brighter spots there, but also some vulnerabilities. Certainly. So what we know from history is that every time we see a global slowdown, African economies have tended to be impacted more forcefully the year after any global shock.
And this is because of the commodity dependence of the region. Some things haven't changed all that much. But in the very near term, looking at the specifics that might be driving current volatility and looking at the concerns around the US's imposition of tariffs, it's worth noting that the US has become a far less important trading partner to Africa over the years.
Now, Africa will still be impacted by any second order effects on its key trading partners. If we should see more of a slowdown in the euro area, the top trading partner for the region, if we should see more of a slowdown in China, inevitably, then this is going to be impacting prospects for African economies. But in aggregate for all of Africa, especially given less US energy dependency on African markets, the overall impact we think is going to be more measured and could well be offset by the other positives already alluded to by Eric.
The fact that for the rest of the world, it looks as though inflation influences are that much more benign. The dollar has been weakening. Other currencies, including African currencies, have been stable.
And this could mean a great deal more interest rate easing still to come in key sub-Saharan African markets. So China's trading relationship with the US is one thing and its fiscal plans for the coming year. Many have talked about whether or not it will implement a huge fiscal stimulus or not and what impact that might have.
Can we focus aside from its relationship with the US on what could be the impact for emerging markets? We've talked a lot in recent years about China's economic influence in Africa. Just a note on that, if you will.
So first of all, on China itself, the big unknown here is whether China can do enough to stimulate its domestic economy to compensate for greater external pressures. What we've seen ever since the Covid crisis is China becoming much more dependent on external demand, which helped to compensate somewhat for what had happened in its domestic property market, weak domestic consumption, evidence that we're still seeing coming through in the data. And what remains uncertain is whether enough can be done to really drive domestic demand in a big way, as we saw after the global financial crisis.
But so far, very little evidence that China's policymakers are thinking up a big, very significant fiscal stimulus. The focus is much more on implementation of the existing fiscal plans. Then how does this play out for the rest of the world, given the multiple points of uncertainty that China faces in its trade negotiations?
Trade with the US, yes, we've seen a relative detente being reached, we think. China using its dominance of rare earths production to its advantage to secure a better deal than might otherwise have been the case. Trade negotiations with the EU still underway.
The big question is, how is this going to impact China's relationship with the rest of the world? We know that China has been a key source of credit growth to developing economies. It's been a key lender to many developing economies.
And while we saw that take a backseat during the COVID crisis and in its immediate aftermath, we were seeing many African countries running into trouble with their external sovereign debt. But we've also seen recovery since then. And we can almost draw a line after that debt crisis that was so prevalent in Africa.
The initial evidence seems to be that China is lending again, but with greater safeguards in place in case things should go wrong. Eric, Razia mentioned there some of those economies being driven by domestic demand. The big one in the report that really jumped out at me was India.
And I wonder, it seems to be like such a good news story, but again, where are the risks? I think there's a couple of things that are really worth highlighting here. The first of which is that the growth story on a standalone basis for India is not new.
It's been a very good story that we've been focused on for a handful of years now. The other point to make is that historically, India is a relatively closed economy, certainly by comparison to a number of the economies in Asia. Now, yes, there are services exports, but goods exports as a percentage of the total have been relatively small.
And so in some ways that has left India a little bit more immune to some of the tariff and trade uncertainty. But they're certainly not going to be able to completely avoid some of the tariff related negotiations that are going on. But I think the growth story is still extremely compelling.
We're talking about growth levels in excess of 6%. Inflation is fairly benign. It's giving, again, like we talked about earlier, the reserve bank the ability to take some more monetary policy flexibility if it chooses to execute on that.
And so I think the story remains one of economic resilience and the fact that domestic demand is such a key driver of the overall story is a really powerful narrative in a world where maybe the frictional cost of engaging in global trade is going to go up. So I still think that India remains one of the key components of growth in the region. In the report, the downside risks to the U.S. economy are mentioned, including expectations for U.S. interest rates.
So what is that going to actually mean for U.S. long term yields and what would the impact be for emerging markets? The first point I would make I guess to answer your questions in reverse order is that if you see an increase in U.S. rates for growth related reasons, in other words, rates are going higher because the business cycle is improving and maybe even higher nominal growth which could imply not only an increase in real GDP but also inflation, but if it's because growth is better, that tends to be a good thing for EM, global growth, U.S. growth, all net positives. We tend to see that reflected in an increase in yields that tends to be more stable, so a decline in volatility and in risk premium.
What we're worried about though and we've been worried about this since Q4 of last year when we put out our year ahead outlook is that the delivery or the implementation of more fiscal stimulus in the U.S. economy, the lack of a viable fiscal trajectory on a medium term basis which I guess is a fancy way of saying do they have plans for how they're going to finance all of this new stimulus, raises real questions about debt issuance, where on the yield curve they will issue this debt and frankly the appetite for investors for more long term debt from the U.S. treasury when the budget deficit is deteriorating. Now wrapping that all up into a summary, I would say we believe the risks are that the fiscal stimulus plans which have been announced are lighter than we would have hoped in terms of the growth impact but the cost of it is still quite high and so for me it is nearly unavoidable that you're going to see an increase in long term financing costs in response to that and I think the increase in long term rates not only for the U.S. but for DM in general is at risk of becoming disorderly. We're seeing a big move higher in Japanese bond yields.
You're starting to see a move higher in U.K. bond yields again. You're seeing a move higher in bond yields in certain parts of Europe. So this is not just an idiosyncratic story for the U.S.
I think this is a broader story and if we were to see a surge in long term financing costs in DM, I worry that you see a spillover to EM as well and for me that's the biggest risk for the second half of the year. Razia, are EM local currency bond markets even able to absorb shocks if this global risk sentiment that is around deteriorates further in the second half and so then the question becomes how is liquidity risk priced compared to those developed markets? So a lot of ifs in terms of the uncertainty and it's worth reflecting on what we've seen year to date.
Normally you would expect that with concerns around global growth deterioration we would be in a risk off environment. This time around it has been relatively benign. It's been different.
For high yielding emerging markets or frontier markets that offer very high nominal as well as real yields, there has been almost a stickiness to investor participation and more recently we've seen investors getting more involved in those markets. Now all of this could change very quickly. What we seem to be seeing in terms of the developed markets sell off in bond markets are these concerns focused around economies that are not going to be growing all that rapidly, where the growth of debt therefore is seen to be more problematic and so we'll have to see how this plays out, but markets will be enormously sensitive to any sudden, any very exaggerated and dramatic move higher in long term year's treasury yields.
We know from history that any time we've been faced with that kind of volatility we do see a big move out of all markets. All markets suddenly become very much more correlated and there's no reason to think that it'll be different this time around. Perhaps what we need to look at more closely is where we've seen significant enough levels of investor participation to drive that correlation and where we're still seeing very light investor positioning in certain markets that might be able to better withstand these pressures, but they're much more likely to be the exception rather than the norm.
If we do face a significant bout of volatility in US treasury markets, this typically impacts everyone the world over and that would be the expectation again. Thanks for that Razia. What I'm picking up is it's a very natural reaction to run from risk and shield from risk.
With that in mind, Eric, what are the prospects for regional currency blocks or monetary unions within emerging markets to reduce dependency on the US dollar? Do you see this happening in a more pronounced way? I see a growing interest in trade blocks and economic blocks and informal agreements to cooperate, collaborate.
I see more evidence of central bank agreements to provide currency lines, funding lines, etc. And so if people really do want to strip out the dollar from trade invoicing, there are opportunities to do so. What I do not see is the emergence of regional currency units and I say that for a couple of reasons.
The first of which and I think this is the most important is in a world of increased economic and trade uncertainty, the benefit of the currency being a potential relief valve for economies is significant and the ability of maintaining independent monetary policy to adjust to a variety of domestic and international factors is absolutely sacrosanct in my opinion and in that kind of an uncertain world, governments and central banks specifically are going to be extremely reluctant to give up that flexibility and independence. Sure, for some economies, there are absolutely benefits of being a part of a currency union when they're joining a group where there are much stronger currencies, but for the countries with a stronger currency, they're going to be extremely reluctant to give up that monetary independence and I think governments are going to be looking to retain flexibility and independence of policy rather than sacrificing it. Okay, so that's really interesting because coming into my sort of final question, there's been a lot of talk around the idea of a BRICS currency, but if you look at it from an ideological point of view, you're not talking about countries which are necessarily in sync where politics is involved and that is a huge part of that equation.
The way I would describe it is that the BRICS construct when it was originally created was an economic grouping. It was a way of describing a collection of economies that were at various stages of the development cycle, various stages of demographic trends. It was a way of comparing and contrasting and grouping different emerging economies together and I think that was extremely valuable at the time and it remains valuable, but the original four BRIC economies have very divergent economic cycles today.
They have very divergent monetary cycles and they're in very different economic and geopolitical positions. So, I think the idea of a BRICS currency even for those four is extremely unlikely and then when you add the fact that there has been a significant expansion of what we would call BRICS membership, I think the idea of a currency unit for that ever-widening universe of sovereigns is unrealistic. Eric, thank you for that.
We just have seconds left on our podcast, so I want to give the last word to Razia today. If you had to sum up the sort of second half of the year for emerging markets, how would you sum it up? So, the emerging market outlook is still very favourable.
We've got benign inflation influences the world over except maybe for the US and that's the point of concern, but emerging markets will be able to take advantage of this to put in place the conditions for growth and provided it's reinforced by reform, they should at least be able to better weather the crisis. We know from history that global shocks are far-reaching, but we shouldn't forget that the US on its own accounts for only 16% of the global trade in goods. For the rest of the world, the 84% of the global trade in goods that could well deepen economic ties between different blocks, we could still see countries building on this.
It won't compensate in the short term for the shocks that are about to hit, but it does create the basis for perhaps different configurations and greater resilience in the future. Very neatly done, Razia. Thank you so much.
And on that note, we wrap up. You have been listening to Eric Robertson, Global Head of Research and Chief Strategist, as well as Razia Khan, Head of Research, Africa and the Middle East, both from Standard Chartered's research team. I'm Aneesha Tank.