Why investors are turning to emerging market equities amid US perma-volatility

The last decade has seen emerging markets (EMs) contend with political upheavals, regulatory complexities, trade dependencies and currency fluctuations. At the same time, the period of ‘US exceptionalism’ – defined by the US’s superior economic growth and market resilience relative to other regions – has captivated investors, resulting in a pronounced tilt towards US allocations.

However, turbulence spurred by policy uncertainty under US President Donald Trump has prompted a renewed sense of optimism about regions outside the US. Recent developments have revealed a swift recalibration of market orientation as the ‘great rotation’ away from US assets gathers pace.

Amid low valuations and a weaker US dollar, investor interest in EMs and Asia has surged. Following the spike in volatility triggered by April’s Liberation Day tariff storm, EMs found a new sense of calm and have now rallied beyond pre-Liberation Day levels. In a marked departure from the trends of the previous decade, the MSCI Emerging Markets Index posted a robust 15.6% return for the first half of 2025, significantly outperforming the S&P 500's 6.2% gain (in US dollars).

Moreover, amid what appears to be an era of perma-volatility in US equity markets, EM equities have quietly exhibited lower volatility compared to their US counterparts since the start of the year. As the US grapples with policy overhaul, elevated recession risks and persistent deficit challenges that led to a historic Moody’s ratings downgrade in May, EMs are enhancing governance and economic frameworks, showcasing stronger fiscal balances and healthier debt-to-GDP ratios.

Set against a backdrop of shifting macroeconomic and geopolitical conditions, EMs are re-entering the spotlight after a decade in the shadows, presenting a compelling narrative for global investors. Here are the unfolding trends driven by recent developments, highlighting the regions benefitting from evolving market dynamics and strategic local measures.

Currency winds and sectoral opportunities revive Brazilian and South African markets

Trump’s unpredictable trade overtures and criticism of the US Federal Reserve has eroded trust in the dollar, casting doubt on its status as a global ‘safe haven’ asset. The dollar index, measuring the US dollar’s strength against six major currencies, declined approximately 10% in the first half of the year as investors retreated amid inflation concerns and Congressional actions that could exacerbate longstanding debt issues.

The recent depreciation of the greenback has created favourable conditions across EMs, with Brazil and South Africa notably benefitting from this currency shift. In regions historically hindered by unstable exchange rates, local equities are now experiencing a boost, thereby becoming more attractive to global investors.

In Latin America, investor focus has shifted from tariff impacts to domestic policy cycles. Central banks across the region have either reached, or are close to reaching, monetary policy stability. High real rates and a more supportive external environment for EM currencies contributed to strong performance in both Mexico and Brazil in the second quarter.

Brazil especially has experienced a notable recovery in 2025, largely driven by the Brazilian real’s approximately 10% appreciation versus the dollar and easing fiscal concerns, following a challenging period in 2024. The currency’s previous weakness afforded Brazil a unique opportunity for rapid recovery amid a weakening dollar.

This shift not only stimulates investor confidence but also invigorates diverse sectors such as agriculture, energy and technology, which are now positioned to seize domestic and international opportunities. We believe Brazil’s enhanced currency dynamic offers promising grounds for investors eager to tap into a revitalised market, despite the tariff clouds lingering above.

On the other hand, South Africa’s market performance is anchored by its strategic sectors: technology and mining. A central figure in its burgeoning tech sector is Naspers, a global powerhouse in consumer internet services and a major tech investor globally, known for its significant stake in Tencent, China’s leading internet company.

Naspers constitutes approximately 12% of South Africa’s index, effectively serving as a substantial proxy for China’s tech sector. This setup is critical because Naspers’ fortunes are closely intertwined with Tencent’s market behaviour, driven by shifts within China’s regulatory environment and tech innovation. For investors, this offers a unique opportunity to indirectly access China’s expansive tech market, allowing them to potentially benefit from its growth while minimising direct exposure risks related to market volatility and regulatory uncertainties.

Complementing this influence is South Africa’s mining sector, where abundant gold stocks have surged amid rising global gold prices as investors flock to safe havens, enhancing national indices. This dual-sector strength positions South Africa as an appealing option, in our view, for investors seeking growth opportunities alongside a commodity-based hedge against volatility.

For global investors, we believe Brazil and South Africa present promising value propositions, marked by resilience and adaptability. While Brazil is witnessing a resurgence with opportunities across growth-ready sectors, South Africa provides unique tech and mining strengths, bolstered by global interconnections. Their evolving performance reframes conventional risk narratives, solidifying these regions, in our opinion, as compelling candidates for astute investment strategies.

The ‘Japanification’ of China and Korea

China, the dominant EM, is confronting a challenging macroeconomic landscape, shaped by the fallout from tariff wars and fiscal policy adjustments. Despite these pressures, Beijing’s economic strategies remain crucial in influencing EM equities, particularly amid shifting global trade dynamics.

In response to the revised 2025 budget deficit forecasts, China has expanded its deficits and issued special bonds to address export challenges and bolster domestic stability amid high savings rates and fluctuating housing markets. Central to these reforms is a corporate governance overhaul, drawing parallels with Japan’s initiatives, focusing on effective capital allocation and alignment with international norms to boost investor confidence.

Mirroring Tokyo Stock Exchange restructuring in 2022, which aimed at improving firms’ return-on-equity (ROE), Beijing’s policies are refining corporate evaluations for state-owned enterprises based on ROE. These efforts include limiting share sales by controlling shareholders in low-dividend firms and initiating a 300-billion-yuan (US$41.9 billion) buyback programme¹.

Consequently, last year, Chinese firms distributed a record 2.4 trillion yuan (US$330.4 billion) in dividends and conducted share buybacks totalling 147.6 billion yuan (US$20.6 billion), underscoring their commitment to enhancing shareholder value and financial health while boosting ROE².

The emphasis on regular dividend payments, demonstrated by the CSI 300 dividend yield reaching its highest level in nearly a decade, marks a pivotal move towards sustainable economic stability³. This acceleration in dividend distributions and share buybacks reflects a clear transition, enhancing investor confidence through disciplined financial management.

As China navigates this transformative period, its blend of strategic foresight and fiscal discipline will shape investment prospects in a market seeking alignment with global profitability and governance standards.

Encouragingly, the push for corporate reform extends beyond China, with South Korea gaining traction in enhancing corporate governance to address the persistent ‘Korea discount’. Its own ‘Value Up’ programme aims to emulate Japan’s achievements by broadening access to stock market gains through the simplification of ownership structures, increased dividend payments and share buybacks. Although this transformation will require time, the anticipated reforms hold promise for narrowing the Korean market’s valuation gap compared to regional counterparts.

Unified performance through dispersion

A notable feature of EMs is their diversity: their collective behaviour is driven by dispersion, achieving impressive double-digit returns despite external pressures such as tariffs and sluggish economic figures in certain regions. Notably, South Africa’s gold stocks have played a key role in this success, reflecting compositional strength and resilience in local equities.

As the year progresses, EMs are experiencing positive momentum, albeit with a degree of caution. The diverse movement of stocks and countries, influenced by displacement effects from global financial shocks, in our view, is creating an ideal environment for astute stock pickers to capitalise on dynamic, bottom-up opportunities within these markets.

Meanwhile, although the short-term outlook for the global economy has improved, the long-term prospects for the US Treasury market and the dollar are showing signs of erosion. As a result, despite the enduring strengths of US exceptionalism – marked by intellectual capital, deep capital markets and entrepreneurship – we believe the US market is no longer the sole investment option. 

As global conditions evolve, EMs are presenting attractive diversification opportunities for investors looking beyond dollar-based assets. With dollar valuations nearing potential peaks, we believe the focus is on leveraging market rallies to reallocate investments to international portfolios. This transition underscores a strategic move towards global engagement, with EMs playing a crucial role in enhancing portfolio resilience and return potential amid changing tides.

¹State Council Information Office, ‘It’s about the stock market! The five departments have spoken out and these contents have been clarified’, (gov.cn), January 2025.
²State Council Information Office, ‘It’s about the stock market! The five departments have spoken out and these contents have been clarified’, (gov.cn), January 2025.
³State Council Information Office, ‘It’s about the stock market! The five departments have spoken out and these contents have been clarified’, (gov.cn), January 2025.