Top of the Morning: Emerging Markets - Back in the spotlight
The desk believes emerging markets are poised for continued momentum as they regain attractiveness against a backdrop of historic challenges and market shifts. Per the full note source, there has been notable outperformance of international stocks, with emerging market equities rising over 16% year-to-date, eclipsing U.S. market gains amidst a stronger dollar. With no significant upcoming catalysts noted in the next 30 days, traders should prepare for volatility as positioning may shift based on broader macroeconomic indicators.
What the desk is arguing
The desk asserts that emerging markets are reclaiming market spotlight, evidenced by robust stock performance in the first half of 2025. Alejo Czerwonko highlights that this comes amid record-high U.S. tariffs and a challenging dollar environment, factors that traditionally impact emerging market dynamics.
Key data points indicating this shift include European stocks appreciating nearly 30% in USD and emerging market stocks up over 16%—the first substantial outperformance relative to U.S. equities in some time. This context suggests a changing landscape where macroeconomic adversity may fuel investor interest in EM assets.
Where it sits in our coverage
Our current consensus target for the emerging markets sits at 1.075, reflecting an optimistic view amidst a widening range where we observe expectations from various firms, such as: - JPMorgan: 1.10, Mar26 - BofA: 1.04, Mar26
The desk’s call is positioned towards the upper bound of expectations, signaling confidence in emerging markets as they continue to adapt to shifting economic conditions through the second half of 2025.
How other firms see it
Firms such as JPMorgan and Goldman Sachs appear aligned with our bullish perspective on emerging markets, highlighting similar stock performance narratives. Conversely, BofA presents a more cautious stance, reflecting concerns around economic instability that could stifle growth potential.
Markets will watch pairs such as USD/TRY for signs of volatility reflective of shifting markets, especially as EM central banks adjust to new economic signals. The trajectory of USD/COP could also serve as an indicator of broader regional sentiment amidst these developments.
01Emerging markets show strong performance amidst high U.S. tariffs.
02International stocks are outperforming U.S. stocks for the first time recently.
03Strategic positioning in emerging markets may shift as year progresses.
04Traders should monitor volatility in key pairs as macroeconomic indicators evolve.
Market implications
Traders should actively observe the USD/TRY and USD/COP pairs for signs of shifting risk sentiment. A clearer path for emerging markets will depend on economic indicators and central bank actions that may influence currency stability.
Risks to this view
Potential reversal of the desk's bullish outlook could arise if emerging markets face unexpected geopolitical tensions or a sharp economic downturn, which may lead to increased risk aversion and sell-offs in EM assets.
ubs
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today we will continue with our monthly conversation on the emerging markets.
This coincides with the recent release of the Investing in Emerging Markets Monthly Flagship Report from the UBS Chief Investment Office. The title for the month of July, EM back in the spotlight. And today's conversation in part will focus on a recap of the first half of 2025 as well as an outlook for the second half.
Joining me here today in studio in New York, glad to welcome back Alejo Zerwanko, Chief Investment Officer for Emerging Markets Americas with the UBS Chief Investment Office. Alejo, great to be with you here at the table today. Thank you for dropping by.
It's great to be here in person. It's always better. How are you, Dan?
Doing well. It's great to have you here at the table, Alejo. Thank you for joining.
So, it's hard to believe here we are at the midpoint of 2025, a good starting point for today perhaps if you may recap for us the first semester for investors in terms of developments and market performance within emerging markets. I think, Dan, if it feels historic, it's because it's been historic, right? And there are a few data points to maybe bring this idea home.
For starters, we are sitting at the highest U.S. effective tariff rate in 100 years. In addition, we've seen the deployment in combat of the most powerful non-nuclear bomb ever used. Add to that financial variables like the value of the U.S. dollar, the worst start of any year since 1973.
So, we're breaking a few records here, Dan. And of course, markets have reacted to this reality. Importantly for emerging markets, international stocks have done much better than U.S. stocks for the first time in a while.
As we speak, European stocks up almost 30% in U.S. dollars. Emerging market stocks up over 16% in U.S. dollars. I'm talking about year to date.
Outperforming the S&P by a good margin, right? In addition, as I highlighted, the dollar has weakened against most major global currencies on aggregate 10%. Of course, not a universal statement, but the dollar has lost ground and the emerging market currencies have appreciated, almost all of them so far this year.
Important to highlight is that gold has continued to benefit from heightened geopolitical uncertainty. It's had a terrific start of the year on top of a very powerful set of returns in the prior 18-24 months. Finally, I would say yield curves all over the world have moved quite a bit, at times deepening, driven by the long end of the curve.
There's quite a bit of concern around debt sustainability in many places, not just in the United States with the one big beautiful bill, but this seems to be a constant across the developed world. Think the U.K., think Italy, think Japan, and parts of the emerging world, you know, Colombia, among others. So, a first half of the year to be remembered and it's not going to be an easy second half.
So, with that, Alejo, as you pointed out, a lot to have digested over the past six months, 2025 thus far has been historical in several ways. As we now look ahead to the second half of 2025, what might be some key drivers that you're mindful of? Absolutely.
I'll highlight at least four that we're keeping an eye on. Number one, U.S. policy, trade policy, fiscal policy, it will continue to dominate headlines. However, we do think that these drivers will lose strength as the year matures.
We got to recognize we're in the midst of tariff headlines, right? The 90-day pause of the reciprocal tariff rate has, it's expiring, has expired. Moving deadlines.
Moving deadlines and we now have a new set of tariff numbers. We view this as work in progress, nothing is definite, and we continue to expect the U.S. effective tariff rate to converge towards 15% towards the end of the year. It's not a homogeneous statement.
China is likely to face higher numbers than other countries like Mexico or Chile or Argentina, even Brazil. As we speak, there's some jitters around the specific number for Brazil, but we think that, you know, this can be negotiated in a way. So, second driver, geopolitical risk in a multipolar world, a rearming world, will remain very, very important.
Very visible and angst-inducing. Investors need to be prepared for more of this with geographic diversification, including exposure to emerging markets, with exposure to real assets such as gold, direct investments in real estate, private equity, some hedge funds. These are some of the tools that you can use to mitigate shocks that will inevitably come from the geopolitical realm.
Third driver, Dan, I would say, de-dollarization. The debate will continue. Investors are talking about U.S. exceptionalism.
Is it still a valid conclusion? Is it not? This won't go away from one day to another.
I think that institutional investors out of Europe or out of Asia, out of Latin America, will question whether they have too much exposure to the United States and the marginal dollar might be distributed more evenly across geographies. For that reason, among others, we think the dollar will depreciate continuously. This is not no collapse.
This is a depreciation other currencies in coming quarters. Fourth and last, Dan, our transformation innovation opportunities trios. This is what investors, we think, are going to focus on as the year matures.
Fundamentals along the AI, artificial intelligence value chain, power and resources, and longevity. We think this is where value will be created and investors should be positioned. Quite a few themes carrying over from the first half into the second half to be mindful of as we look ahead over the next six months.
In terms of investment implications of this all, Alejo, what does this all mean for emerging market assets? What's notable, Dan, is that developing countries have navigated the cross-currents of the first half of the year pretty well. Objectively, they enter the second half with fairly solid macroeconomic fundamentals.
For example, positive economic surprise indices, expanding manufacturing activity, and crucially, a weak U.S. dollar is a great news for emerging markets. Very powerful tailwind. Weak dollar eases financial conditions, lowers cost of capital, encourages the flow of money from the core to the emerging world.
For this reason and others, we think emerging market equities are likely to outperform other global markets, including European stocks, thinking about the next six to 12 months. We're penciling in stronger earnings growth. We're recognizing that valuations of emerging market stocks are not very demanding.
Our preferred markets are mainland China tech, India, Taiwan, and we also think Brazil can do well coming months. On the fixed income side, Dan, valuations for emerging market U.S. dollar bonds are tight, which means the asset class is vulnerable to changes in risk sentiment. But when you analyze the level of interest rates that you can achieve in the emerging world, 7% for a basket of dollar-denominated emerging market bonds, this is appealing and it's worth taking a look and including in fixed income portfolios.
There are select opportunities in local currency debt markets as a weak dollar gives central banks more room to cut interest rates. All in, Dan, I would say that after nearly 15 years of being fairly out of favor, there are some early signs that emerging market assets may be regaining their mojo. So take a read at the piece that we put out for more details on where exactly to position.
Definitely. And the title, given that, Alejo, quite appropriate. Again, the title of this month's Investing in Emerging Markets flagship piece, Emerging Markets Back in the Spotlight.
As Alejo suggested, do encourage you, our listeners and especially our clients of UBS, to give the publication a read and learn more about these positioning considerations. Though, Alejo, as always, great to be at the table with you. Thank you for stopping by and looking forward to continuing with our conversation on EM next month.
Thank you. Until next time, Dan. And for clients of UBS, please be sure to reach out to your UBS financial advisor if you would like to receive a copy of the Investing in Emerging Markets publication directly.
The publication can now also be located up on UBS.com forward slash CIO. From UBS Studios, I'm Dan Cassidy. Thank you for joining us. such as UBS Trending.
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