Emerging markets are poised to outperform developed economies

Fund managers say developing-nation assets are poised to outpace those in richer markets in the coming months, ending a spell when both moved together after US President Donald Trump began his tariff drive in April.

They base that call on the prospect of easier Federal Reserve policy, investors rotating away from US holdings, stricter budgeting across many emerging economies, and milder inflation that supports growth without overheating prices.

Fidelity International, T. Rowe Price and Ninety One Plc point to these forces as reasons for stronger relative gains in developing markets. They argue that softer inflation, alongside tighter fiscal management, leaves room for interest-rate cuts and bank lending that can spur activity.

Analysts see bigger upside in EM stocks

Forecasts back the view. Analysts project the MSCI Emerging Markets Index to climb about 15% over the next year, versus roughly 10% for the developed-market benchmark.

As per Bloomberg, flows are lining up with that narrative too, as equity money is moving into EM faster than into developed peers, judging by some of the world’s largest exchange-traded funds.

“EM equities are likely to outperform as they enjoy the tailwinds of easing local monetary policy across most markets, boosting domestic lending and consumption but also a weaker dollar,” said George Efstathopoulos, a fund manager at Fidelity in Singapore. “It’s also important to remember that the Fed as the most significant central bank will most likely be resuming easing in coming quarters.”

Activity since Trump’s “Liberation Day” on April 2 shows the shift.

Around $5.8 billion has gone into the iShares Core MSCI Emerging Markets ETF, the biggest EM tracker, equal to about 5.8% of its assets. The Vanguard FTSE Developed Market ETF drew $5.6 billion over the same period, which is roughly 3.3% of that fund’s holdings.

Rate cut bets strengthen after Fed remarks

A fresh signal from the Fed added momentum on Friday. Chair Jerome Powell indicated the central bank is likely on a path to cut rates in September. After his Jackson Hole remarks covered by Cryptopolitan, traders increased wagers on an easing move at the Sept. 16–17 meeting.

Since April 2, both the MSCI Emerging Markets Index and its developed-market counterpart have advanced about 14%, helped by hopes that Trump’s tariff threats were largely bargaining chips.

Bond markets showed a similar pattern. A Bloomberg index of EM debt returned 4%, while a comparable developed-market gauge gained 3%.

Another advantage for EM assets is policy discipline, said Archie Hart, who oversees emerging-market equities at Ninety One in London.

“If we look at policymakers in emerging markets, they’re conservative, they’re disciplined by the market, they’re pragmatic, so we don’t see these huge unsustainable fiscal deficits that you see in developed markets,” he said.

Valuations also tilt toward the developing world, according to T. Rowe Price. “We have an overweight stance on emerging-market equities in our multi-asset portfolios” as valuations remain more reasonable than those in developed markets, coupled with higher earnings growth prospects, said Thomas Poullaouec, a portfolio manager in Singapore.

Currency markets offer select opportunities

Currencies play a role as well. Poullaouec still sees room in select developing-nation FX, while cautioning on positioning risks.

“Much of the upside in EM currencies has already been priced in, particularly given the crowded US dollar short positioning,” he said. “That said, we maintain positive exposure to Latin American currencies, particularly the Brazilian real, supported by elevated carry and improving fiscal sentiment.”

Local-currency debt is part of the upbeat case. Inflation surprises have cooled sharply in emerging economies.

The Citi Inflation Surprise Index for EM has averaged minus 19 this year, down from peaks above 40 in 2022. A similar gauge for the Group-of-10 economies was minus 12 in July. Negative readings mean inflation came in below forecasts.

The smartest crypto minds already read our newsletter. Want in? Join them.