For years, investors primarily focused on the US and Europe while emerging markets were seen as volatile, politically unstable, and lacking global competitiveness – but Donald Trump has torn up half a century of global norms.
Investors are reconsidering the search for returns. The result: emerging markets (EMs) are back in favour.
The Trump effect
Trump’s second term has upended traditional market dynamics. The US, once viewed as a bastion of institutional strength and financial stability, now shows signs of political and economic fragility. It is behaving like an emerging market.
Treasury yields are rising and the dollar is weakening – the exact opposite of what you might expect during a typical ‘risk-off’ environment.
Trump’s policies have also accelerated moves towards de-dollarisation and triggered increased capital flows into emerging markets. But the story is larger than just a reaction to US instability. It is also about the ascent of new global powers, particularly the resurgence of China.
China’s reinvention
A decade ago, China was seen as a low-cost manufacturing hub. Now, thanks to sustained investment in education, China boasts some of the world’s top engineers and scientists.
Production of cheap textiles and trainers has largely been outsourced to Vietnam and Cambodia, with China instead focused on high-tech, higher-margin sectors.
China dominates the global renewable energy supply chain, benefiting from the West’s energy transition, and is the world’s largest car exporter.
Its electric vehicle (EV) manufacturers, such as BYD, are outselling Tesla in Europe and even threatening the existence of traditional German carmakers, given the superior battery performance and charging infrastructure of the Chinese models.
China has also made major strides in artificial intelligence (AI). The ‘DeepSeek moment’ in January blew the assumption of US AI dominance apart.
US export restrictions on advanced chips have not halted progress as China is rapidly developing its own semiconductor capabilities and Nvidia’s CEO Jensen Huang recently warned that Chinese AI firms are now ‘formidable’.
Self-sufficiency is also a primary goal of the Chinese government, with strides across industries including biotech, petrochemicals, and healthcare.
In addition, China is the top trading partner for most emerging markets. Its domestic consumption remains low as a share of GDP, suggesting further potential for rebalancing and growth.
No doubt challenges remain and cyclical businesses vulnerable to economic downturns are best avoided. Investment opportunities in companies with strong balance sheets and quality governance in the tech and consumer sectors are most appealing.
Asia beyond China
China might dominate headlines but the rest of Asia is also thriving and plays a critical role in the global tech supply chain. For example, Nvidia’s GPUs are manufactured exclusively by Taiwan’s TSMC and its high-bandwidth memory chips come from South Korea’s SK Hynix.
The AI revolution will be powered by Asia, and the US knows this.
Trump is encouraging – almost enforcing – TSMC and others to shift production to America, and this strategy is beginning to bear fruit. TSMC has already committed $150bn to developing US facilities.
India’s opportunity
India today is reminiscent of China two decades ago: a high-growth economy with long-term potential. It offers political stability, an educated and largely English-speaking workforce, and a government committed to building up domestic industry through its ‘Made in India’ strategy.
India’s economy is forecast to grow at 6%-7% annually over the next 10 to 15 years and benefits from a vast domestic market with growing consumption, together with increasing clout on the global stage.
The country is home to many well-managed, investable companies and, unlike China, it does not suffer from overcapacity issues.
While Indian equities have underperformed broader emerging markets in the short term, impacted by a modest economic slowdown, a mixed earnings season, and the announcement of 50% US tariffs officially targeting India’s purchases of Russian energy, we believe that the long-term structural growth story remains intact.
The tariff environment remains highly uncertain and is likely to evolve depending on geopolitical developments. Meanwhile, the recent announcement of a GST reform is a constructive signal and could provide renewed support for domestic consumption in the coming quarters.
Although valuations remain elevated, they have come down from recent peaks. Following a ~20% underperformance versus emerging markets over the past 12 months, the Indian market could present attractive entry points in the months to come.
Latin America’s momentum
Mexico is benefiting from nearshoring as US firms look to relocate supply chains closer to home. The country has a cooperative relationship with the US under president Claudia Sheinbaum, particularly on border security. Sectors such as industrial real estate, domestic banks, and infrastructure are attracting investor interest.
Brazilian equities stand out as almost uniquely cheap. While fiscal management has long been a thorn in Brazil’s side, the country currently offers high real rates (above 9%), making both the real and real-denominated debt attractive.
In this environment, utilities, with their bond-like characteristics, look compelling, offering a combined real return of nearly 12% given the equity risk premium.
Brazil’s growing oil and agricultural output, combined with an entrepreneurial population, are further long-term positives. And with elections in 2026, a change in leadership could bring about stronger economic and fiscal reforms.
Are EMs great again?
With investors questioning whether the era of US exceptionalism is ending, many are re-evaluating the potential of emerging markets. China is asserting more innovative leadership in technology and manufacturing, India will sustain a high-growth phase and Latin America offers undervalued opportunities.
With stronger fundamentals and rising global relevance, EMs are not just rebounding – they are reshaping the future of investment.
Naomi Waistell, is co-manager of FP Carmignac Emerging Markets. The views expressed above should not be taken as investment advice.