As President Donald Trump’s trade agenda continues to shape global markets, investors are increasingly turning to emerging markets (EM) to find opportunities that can withstand the unpredictability of Trump’s policies. From China’s growing artificial intelligence (AI) sector to the rising economic dynamism in the Middle East, these trades are helping investors mitigate the risks tied to tariffs and trade tensions.
Emerging Markets: A Safe Haven?
Emerging markets have seen a strong start to the year, especially in stocks, bonds, and currencies, with February proving to be an exception due to Trump’s renewed tariff threats. The tariff moves have left investors searching for more resilient markets that are not directly impacted by trade with the U.S. and are insulated from the volatility surrounding Trump’s second term.
Finding Opportunities Amid Market Dislocation
“Despite all this negativity, one needs to find dislocation in market prices that give opportunities,” said Jitania Kandhari, deputy CIO at Morgan Stanley Investment Management. Selective trades are the key to navigating these uncertain times, and some of the best opportunities are not reliant on exports to the U.S., interest-rate cuts, or a weak dollar.
AI Rally in Emerging Markets
One of the standout trades in emerging markets has been the artificial intelligence (AI) boom. Last year, investors saw significant returns from local companies benefitting from the AI surge in the U.S., such as Taiwan Semiconductor Manufacturing Co. (TSMC), which saw an 81% increase due to its pivotal role in chip production for AI applications.
This year, however, the focus has shifted from TSMC to Alibaba Group Holding, which has seen a 55% increase. Alibaba’s appeal lies in its focus on China’s domestic AI adoption rather than spillover revenue from the U.S. As such, it stands as a hedge against Trump’s tariffs, with China’s commitment to investing in AI remaining strong despite external pressures.
Currency Stability and Pegged Currencies
For equity investors, a key risk is the stronger dollar, which can erode returns made in local currencies. Countries with stable currencies and strong reserves are emerging as attractive options. Middle Eastern nations, in particular, are drawing attention.
Brendan McKenna, an EM economist and FX strategist at Wells Fargo Securities, noted that the UAE, Saudi Arabia, and Qatar are becoming safe havens for investors. Dubai, in particular, has seen its stock market rise to record highs, driven by an influx of expatriates. The region’s currency peg to the dollar protects investors from foreign exchange risk, which is a significant advantage amid global volatility.
Trade Shifts in Emerging Markets
Morgan Stanley Investment Management is focusing on economies with lower sensitivity to exports, strong domestic credit cycles, and countries that may benefit from shifts in global trade. Countries in Southeast Asia, parts of Eastern Europe, and some Latin American markets are prime targets.
In Latin America, Brazil has emerged as a favorite due to its cheap valuations, rate hike potential, and low exposure to Trump’s tariff risks compared to Mexico. According to UBS Group AG, the Brazilian real is expected to outperform the Mexican peso as investors seek to capitalize on Brazil’s economic growth.
Standalone Reform Stories
Some emerging markets are also gaining attention for their strong reform stories. In Colombia, for example, the potential for a business-friendly government next year has boosted the country’s stock and currency. Meanwhile, in Venezuela, there’s growing hope for debt restructuring, pushing bond prices higher. In Turkey, the government’s policy of managing inflation while stabilizing the lira has helped create an environment of unusual stability for global investors.
Local-Currency Bonds as a Favored Asset Class
Local-currency bonds are becoming an increasingly favored asset class in emerging markets. Even though Trump’s tariffs may add to U.S. inflation and limit Federal Reserve rate cuts, emerging markets are still expected to experience disinflation and rate cuts of their own. This divergence is helping local-currency debt outperform, with higher-yielding currencies such as those in Brazil, Mexico, South Africa, and Turkey offering better returns to investors.
Marcelo Assalin, head of EM debt at William Blair, emphasized that selective investment in local-currency debt is expected to outperform in 2025. Higher-yielding currencies are seen as undervalued and offer higher carry to investors.
Caution Amidst the Optimism
While emerging markets have performed well in the first two months of the year, investors are advised to be cautious about extrapolating these gains over the rest of the year. On the last day of February, emerging market assets saw a broad selloff, highlighting the fragility of these positions in the face of further tariff escalation.
Charles Diebel, head of fixed income at Mediolanum International Funds, cautioned, “This is a storm that no one will be completely immune to.” The volatility stemming from Trump’s trade agenda continues to be a risk that investors must navigate carefully.
Conclusion
While emerging markets have provided opportunities that help shield investors from the unpredictability of President Trump’s policies, these markets are not without risks. From AI-driven stocks to countries with stable currencies and strong domestic growth stories, investors are finding diverse ways to insulate themselves from the economic impact of tariffs. However, as recent market movements have shown, these investments are not immune to broader global shocks, and caution remains essential in navigating the year ahead.
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