Emerging Markets Defy Investor Gloom to Outshine Developed World

Despite a backdrop of geopolitical uncertainty and global trade turbulence, emerging markets are delivering a robust performance — significantly outperforming developed counterparts in 2025.

🌍 Striking Market Resilience

• Equities & Bonds: A key JPMorgan index of local-currency emerging-market bonds and the MSCI EM equity gauge are both up ~10% this year, compared with just 4.8% for the MSCI World and 6.6% for the FTSE World Government Bond index.
• Investor reweighting: After underperformance between 2017 and early 2025, fund managers are reallocating capital into undervalued EM assets offering stronger inflation-adjusted yields .
• Currency dynamics: A weaker U.S. dollar has eased currency pressures, allowing EM central banks to lower rates — providing stimulus to both equity and bond markets.

🔎 Drivers Behind the Rally

1. Yields finally attractive
   EM local-currency debt yields — when adjusted for inflation — are at multi-decade highs, presenting compelling payout potential relative to developed counterparts.
2. Dollar retreat
   The downtrend in the U.S. dollar is easing pressure on EM currencies and reinforcing investor confidence in local markets.
3. Tech-led momentum
   Chinese tech (“soft tech”) has outperformed, with renewed global interest in Chinese and Korean equities helping to propel the broader EM rally.
4. Perception shift
   With fiscal and deficit concerns growing in developed economies—and relative improvements in EM debt profiles—investors are more open to rebalancing portfolios.

🌎 Regional Highlights

• China: Leading tech rebound with strong year-to-date gains.
• Brazil & Mexico: Latin American assets benefit from decent valuations and sovereign bonds yielding high returns.
• India & Korea: India tops global equity returns recently; Korea is gaining traction post-policy stabilization.

🚦 Risks & Sentiment

• Fund flows: Even with strong asset performance, EM equity funds saw $22 bn in outflows by April, partly reversing later with $11 bn inflows during May-June.
• Global headwinds: Mideast conflict and U.S. yield volatility continue to cast shadows, though EM assets have demonstrated resilience.
• Trade war concerns: The World Bank notes that trade tensions will slow growth in two-thirds of developing countries this year — yet financial markets continue to find EM assets appealing .

📆 What to Monitor Next

🧭 Final Takeaway

Emerging markets are bucking a gloomy global backdrop and outperforming developed peers due to favourable yield dynamics, a weakening dollar, tech-driven growth in China, and shifting investor sentiment. While macro risks remain, the rally underscores a potential strategic pivot toward EM exposure.