BlackRock Institute stated that emerging markets have performed impressively this year. In fixed income, global emerging market bonds have delivered nearly 9% returns, while U.S. Treasury returns were only 4.5%. In equities, the MSCI Emerging Markets Index has risen by 20%, far exceeding the 14% gain of the MSCI World Index, which represents developed markets. A weaker U.S. dollar, economic resilience, and disruptive trends have collectively driven the performance of emerging markets. Due to diverging performances across countries, selective positioning is necessary. BlackRock Institute holds a neutral view on overall emerging market equities while identifying bright spots and favors local currency bonds in emerging markets.
A weaker U.S. dollar has contributed to the growth in returns of emerging market assets this year. Data shows that the U.S. dollar has depreciated by about 10% against major currencies this year, while many emerging market currencies have performed strongly. Typically, a weaker dollar is accompanied by strength in emerging markets, including equities, as the cost of servicing dollar-denominated debt decreases, thereby supporting corporate profit growth. Additionally, for U.S. dollar-based investors, when they convert returns from emerging market assets back into dollars, their actual returns are further amplified by exchange rate factors.
BlackRock Institute noted that another driver of emerging market strength is the improvement in the macroeconomic environment. The International Monetary Fund predicts that the growth gap between emerging and developed markets in 2025 will narrow compared to the 2010-2019 average, but this masks structural changes occurring in some countries. BlackRock believes these changes create favorable conditions for sustained economic growth.
For example, India and Vietnam are making strong progress in the services and manufacturing sectors, respectively, while Mexico and Brazil demonstrate monetary policy discipline. Chile’s robust financial system adds stability. Additionally, inflation in some emerging markets has returned to pre-pandemic levels, and rate-cutting cycles have begun. For instance, Mexico has cut rates five times this year, Indonesia four times, and Poland three times.
BlackRock Institute mentioned that the Fed is poised to implement rate cuts. Although the extent of cuts is expected to be limited, this will provide emerging market central banks with more room for monetary policy easing, as following the Fed’s policy steps can reduce the risk of local currency depreciation. The institution believes now is a good opportunity to lock in yields on local currency bonds in Hungary, the Czech Republic, South Africa, Brazil, Mexico, and Colombia.
The third driver is disruptive trends. As consistently emphasized, disruptive trends are the new engine driving investment returns, not macro factors, and their impact on emerging markets varies. Therefore, BlackRock Institute stated it would identify areas with bright spots but maintains a neutral view on overall emerging market equities in the short term.
BlackRock Institute believes that supply chain restructuring benefits countries like Mexico, Brazil, and Vietnam. Taiwan (China) and South Korea are deeply involved in semiconductors required for AI infrastructure, while China is also advancing its AI technology development. South American countries like Chile and Peru benefit from demand for critical materials under the low-carbon transition trend. From a long-term perspective, India has the potential to develop into a cutting-edge digital economy, thanks to its young population and accelerating digitalization. India’s growth potential is one reason for maintaining an overweight view on emerging markets in the long-term strategy.
