Why Now Is the Time to Reconsider Emerging Markets

The Tariff Landscape and Its Impact

Global financial markets have experienced significant turbulence this year due to evolving tariff policies introduced by major economies. When U.S. President Donald Trump unveiled his reciprocal tariff plans in April, several developing nations, including Sri Lanka, Cambodia, and Vietnam, faced steep duties exceeding 40%. With the expiration of a temporary moratorium approaching, market participants remain skeptical about the longevity of such high rates. According to Bank of America's Fund Manager Survey, which consulted 222 fund managers overseeing assets worth $587 billion, there is growing interest in emerging markets equities. This shift reflects optimism regarding future tariff adjustments, with nearly 80% of respondents expecting final duty levels below 82%, averaging around 13%.

This recalibration in investor sentiment underscores the resilience of emerging markets despite external pressures. By diversifying portfolios into these regions, institutional investors aim to mitigate risks associated with overexposure to traditional markets while capitalizing on favorable valuations and robust growth prospects.

A New Era for Investment Opportunities

Goldman Sachs recently launched its Emerging Markets Green and Social Bond Active ETF, signaling a broader trend toward sustainable investments in developing economies. Listed on prominent exchanges such as the London Stock Exchange and Deutsche Börse, this fund focuses on corporate and sovereign fixed-income securities linked to environmental and social initiatives. Such moves highlight the increasing appeal of emerging markets not only for their economic fundamentals but also for their commitment to responsible development practices.

Archie Hart, a co-portfolio manager at Ninety One, emphasizes the "EM-ification" phenomenon where developed markets adopt more volatile policies akin to those seen in emerging counterparts. In contrast, many developing nations maintain prudent fiscal approaches, raising interest rates early to combat inflation and managing deficits responsibly. These characteristics position them favorably against established markets plagued by uncertainty and declining confidence in institutional frameworks.

Uzbekistan: A Beacon of Stability

BofA strategists identified Uzbekistan as a promising destination for external debt investment, citing factors such as rising gold prices bolstering current accounts, fiscal balances, and foreign exchange reserves. Ongoing reforms in energy tariffs further strengthen the nation's financial health, reducing reliance on borrowing. Additionally, positive outlooks from credit rating agencies like S&P and Moody’s indicate potential upgrades within the year, enhancing attractiveness for global investors.

J.P. Morgan echoed similar sentiments, advocating for increased allocations in Uzbekistan amidst geopolitical stability concerns elsewhere. Bordering key Central Asian states, the country boasts consistent GDP growth exceeding 5% annually since 2017. Its strategic location and proactive policy measures make it an attractive option for yield-seeking investors looking beyond conventional hubs.

Broadening Horizons Across Emerging Economies

Greg Luken, founder of Luken Wealth Management, highlights the overlooked potential of emerging markets traditionally allocated minimal shares in diversified portfolios. Countries such as India, Brazil, and China offer substantial upside potential supported by advantageous demographics and discounted valuations compared to U.S. counterparts. Price-to-sales and price-to-earnings ratios underscore compelling value propositions, prompting greater engagement from forward-thinking asset managers.

Deutsche Bank corroborates this viewpoint, identifying specific nations within the Global South bloc—comprising over 130 countries—as prime candidates for investment consideration. Tailwinds such as demographic shifts, integration into global supply chains, and contributions to nominal GDP reinforce their significance. Notable mentions include India, Indonesia, Brazil, Mexico, Saudi Arabia, Egypt, the Philippines, Vietnam, Turkey, and the UAE, each presenting unique advantages tailored to varying risk appetites.