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Rob James

Market Outlook

Emerging Markets (Unconstrained) Outlook

Outlook
14 April 2025

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Emerging Markets Portfolio Manager

Latest Emerging Markets (Unconstrained) economic and market outlook. 

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Equity markets have seen some very extreme moves as they try to make sense of the Trump administration's erratic tariff policy and its potential implications. US ‘liberation day’ tariffs were initially far more severe than we and other investors anticipated. They would have represented a major exogenous shock to the global economy and markets, being orders of magnitude larger than those announced in Trump’s first term. However, the tariffs seemingly became unsustainable economically, financially and politically for the US president, who almost immediately paused most of them, while doubling down on Chinese tariffs. Clearly the situation remains fluid and can change very quickly. As such, at this stage it is difficult to accurately quantify the impact, partly because we do not know what the end point of tariffs will be, and partly because of the lack of any modern historical precedent for such an unorthodox policy shift. This uncertainty is exacerbating market volatility.

Key factors to monitor will be negotiation efforts with various countries, further retaliatory measures from China, as well as any monetary and fiscal easing. Beijing has already announced countermeasures, andis likely willing to take some pain rather than be seen to capitulate to Trump. As it demonstrated through its protracted Covid policies, China has a high threshold for such pain. It also has the ability tostimulate its economy to partially offset the impact of tariffs. Our base case is therefore that a deal between the US and China will not be achieved in the short term, although we do not rule out a partial rapprochement in the medium term. With regard tomonetary policy, markets began to price in a decidedly dovish response from the Fed, although this is far from certain given that tariffs are likely to lead to higher inflation. On fiscal policy, Trump’s administration has talked of passing tax cuts this year to offset some of the tariff headwinds. There may also be further offsets to global consumers to the extent that slower growth results in a falling oil price and lower interest rates. Finally, tariffs should accelerate the structural derating of the US Dollar, which we see as one of the key pillars of our medium/longer term positive thesis on EM equities, although during global risk-off events it may still benefit from its traditional safe-haven status.

The widespread, largely indiscriminate selling has hurt our portfolios. Key sources of pain have been Argentina and China. The former has sold off as a peripheral market that performed very well last year. Such strong performance attracted many marginal holders that were not traditional EM investorsand which are now being shaken out. We have largely continued to run our positions here as the macro backdrop continues to improve, with an IMF deal seeming imminent, though we are very mindful of lower oil prices and external shocks that could greatly impact the current account and put the macroeconomic plan at risk.

By contrast, we substantially reduced China, and generally derisked our portfolios, significantly increasing cash and adding to defensive sectors such as Telcos and Utilities, as well as reducing underweights to markets such as Korea.

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