2025 is expected to be characterised by volatility and unpredictability for emerging markets (EM). The second Trump presidency adds to the uncertainty with looming tariffs that might impact growth, monetary and geopolitical environments. In addition, China’s underperformance is restraining the emerging markets outlook.

“A likely increase in trade protectionist policies among major economies will hurt GDP growth in most EMs in the next couple of years, but the magnitude of the impact will depend on those policies’ details, which will become clearer in the coming months,” says S&P’s Emerging Markets Chief Economist Elijah Oliveros-Rosen.

According to Oliveros-Rosen, the rating agency only expects a modest increase in “tit-for-tat” tariffs between the U.S. and China in 2025, with no new tariffs for the rest of the world. He suggests that this scenario would likely have a relatively minor net impact on GDP for most major emerging markets outside of China.

J.P. Morgan Asset Management points out that China’s recent challenges have not affected other emerging markets uniformly. They note that “friend-shoring” and shifts in global trade patterns have benefited countries like Mexico and Vietnam, while pro-growth domestic policies have driven increased investment in India.

Oxford Economics remains cautious on the macro-outlook for emerging markets. “It may take until 2027 for supply-side disruptions to dominate the outlook for EMs, but markets won’t wait that long. We anticipate they will react sharply to tariff announcements,” a recent report states.

EM growth estimations in aggregate are around 4% for 2025.

Emerging Markets Outlook: Equities

For emerging markets equities, 2024 was a positive year, with returns outperforming most developed international markets.

Martin Currie expects the trend to continue in 2025 and beyond: “Strong economic growth, improving inflationary environment and easing interest rates should be supportive of EM equities in 2025. We think markets will refocus on company fundamentals and that the key building blocks for growth are those operating in the following areas.”

The equity specialist within Franklin Templeton sees three main themes for the years to come. 1) EM companies are at the heart of Artificial Intelligence (AI) innovation, 2) India has the potential to drive returns in EM over the next decade, and 3) Policy should continue to support Chinese equities in 2025.

Pictet Asset Management notes that while supportive global easing, stable domestic inflation, and robust growth conditions create a favourable backdrop for emerging market stocks, potential headwinds to global trade temper their optimism about EM’s prospects in 2025.

While China will be the most impacted by tariffs, Pictet notes, it has a strong position for defensive monetary and fiscal stimulus. “Investor mood is less negative than it was a few months ago, but we think it is too soon to go long in light of the imminent pickup in worrying news flow on US-China friction,” says the Pictet Asset Management Strategy Unit in their 2025 outlook.

“Nevertheless, the policy cycle having turned supportive with the authorities showing clear intent to draw a line under cyclical weakness. We thus expect Chinese stocks to perform largely in line with global equities in 2025, albeit with periods of heightened volatility,” they added.

Emerging Market Outlook: Bonds

Many asset managers opine that 2025 might be an attractive year to own fixed income assets.

BlueOrchard highlights that emerging market corporate credit spreads are historically and relatively tight, but they view these valuations as justified by strong fundamentals. Defaults are near historic lows, with EM corporate defaults expected to remain below 1% in 2025.

Investment-grade corporate leverage has significantly decreased, reducing default risks and supply, thereby supporting pricing. “We also expect that better demographics in emerging markets will help continue a strong long-term growth trend. So, while emerging market credit spreads may appear low, we believe that this valuation is justified by lower expected risks,” notes Evariste Verchere, Head of Public Debt Portfolio Management at BlueOrchard.

Pictet highlights the prospect of attractive returns EM bonds offer. “Further interest rate cuts from the Fed will encourage emerging market central banks to ease monetary policy further, at a time when they are enjoying better economic growth than their developed market counterparts,” they say.

Except China, real yields in EM bonds remain above their five-year averages, Pictet highlights. “Mexican sovereign bonds, for example, offer a real yield of some 7%, at a time when the economy is expected to benefit from further cuts in interest rates.”