How Bets on US Weakness Are Fueling a Historic Emerging Markets Rally

By: Payel

Published on: Mar 27, 2025

Emerging Markets Rally as Investors Pivot from US Assets

A seismic shift is underway in global markets. Investors, wary of slowing US growth under President Donald Trump’s aggressive tariff policies, are pouring capital into emerging markets (EM). From Latin American currencies to Eastern European bonds, EM assets are surging as traders seek alternatives to overvalued US equities and a weakening dollar.

Key Drivers of the EM Rally

1. US Economic Uncertainty: Trump’s tariffs threaten to stifle growth, pushing investors toward undervalued EM opportunities.


2. Dollar Weakness: A softer dollar boosts EM currencies and makes dollar-denominated debt more manageable.


3. Attractive Valuations: EM equities trade at their lowest levels relative to the S&P 500 since the 1980s.


4. Global Rebalancing: Europe’s fiscal stimulus and China’s economic reforms offset fears of a US slowdown.

Why Emerging Markets Are Outperforming in 2025

1. The US Growth Dilemma

Trump’s tariffs on imports and retaliatory trade wars have cast a shadow over the US economy. While the S&P 500 has dipped 1.12% this quarter, EM equities are on track for their best Q1 since 2019.

Bob Michele, JPMorgan Asset Management:
“For years, investors crowded into US assets. Now, EM valuations look irresistible.”

2. EM Currencies & Bonds: Standout Performers

• EM Currencies Index: Up 2% YTD (Brazilian real, Chilean peso, and Colombian peso lead gains).


• Local Bonds: Eastern European debt attracts inflows as investors chase higher yields.


• Mexican Peso: Defies tariff risks with a 3% YTD rise; hedge funds are the most bullish since August 2024.

Top Regions & Assets to Watch

1. Latin America: High-Yield Havens

• Brazil: Real surges as commodity exports offset tariff risks.


• Colombia & Chile: Sovereign bonds attract TCW Group and T. Rowe Price.


• Mexico: Peso resilience signals confidence in nearshoring trends.

BlackRock’s Axel Christensen:
“Latin America offers bright spots as US performance gaps narrow.”

2. Eastern Europe: Bond Market Revival

• Poland & Hungary: Local bonds rebound on EU stimulus and stable inflation.


• Turkey: Lira stabilizes amid rate hikes and foreign investment inflows.

Edwin Gutierrez, Aberdeen Group:
“We’re finally overweight EM Europe after years of underperformance.”

3. Asia: Selective Opportunities

• India (INR): High real yields and tech-driven growth attract Franklin Templeton.


• Indonesia & Philippines: Hard currency debt sees record demand.


• Vietnam: Bonds rally on manufacturing boom despite tariff risks.

Risks & Challenges for EM Investors

1. US Resilience Could Derail the Rally

If Trump’s tariffs fail to dent US growth, Treasury yields and the dollar may rebound, sparking capital flight from EM.

2. Geopolitical Flashpoints

• US-China Tensions: Escalation could disrupt Asian supply chains.


• Middle East Conflicts: Oil price volatility impacts commodity-dependent EMs.

3. Overvaluation Concerns

While EM assets are cheap relative to US peers, some markets (e.g., Indian equities) are nearing stretched valuations.

Expert Insights: Is the EM Rally Sustainable?

Bullish Case

• Ashmore Group: “The end of US exceptionalism is a decade-long trend. EM allocations could double.”


• Carmen Altenkirch, Aviva Investors: “EM hard currency debt spreads are stable versus developed markets.”

Bearish Warnings

• Eric Souders, Payden & Rygel: “We hold cash at 2022 highs as a hedge against US resurgence.”


• Bank of America: $43.4B flowed into global stock funds recently, signaling lingering US optimism.

How to Invest in Emerging Markets

1. Diversify Across Asset Classes

• Equities: MSCI EM Index ETF (EEM)


• Bonds: iShares JPMorgan EM Local Currency Bond ETF (LEMB)


• Currencies: WisdomTree EM Currency Strategy Fund (CEW)

2. Focus on High-Conviction Themes

• Commodity Exporters: Brazil, Chile, Indonesia.


• Tech-Driven Economies: India, Vietnam.


• Reform Stories: Mexico, Poland.

3. Monitor Key Indicators

• US Treasury Yields: Rising yields could strengthen the dollar.


• Trade Data: Watch for tariff impacts on EM exports.


• Central Bank Policies: Rate cuts in Europe/China may boost EM liquidity.

Conclusion: A New Era for Emerging Markets?

The EM rally of 2025 reflects a broader rebalancing in global portfolios. With US exceptionalism waning, investors are rediscovering undervalued opportunities in Latin America, Eastern Europe, and Asia. However, risks like US resilience and geopolitical shocks demand caution.