Emerging market equities: Tariffs, tensions, and tech

Tune in to hear Devan and Tom unpack a surprisingly strong second quarter before delving into why they remain cautiously optimistic in emerging market equities for the rest of 2025.

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Tom Harvey

Hello, I'm Tom Harvey with Aberdeen and you're listening to the emerging Market Equity Quarterly podcast show that looks at what happened in the most recent quarter and provides our outlook for the asset class. Today, I'm joined by my colleague Devan Kaloo, head of Global Emerging Markets. Devan, welcome to the podcast. It's great to have you today. 

Devan Kaloo

Thank you very much.

Tom Harvey

And I think as usual here, we'll start with a little bit about what we saw in markets more recently. Obviously kind of a lot going on during this past quarter. A lot of which of course happening here in the United States, but a lot to talk about. What did that mean for our strategy? And then, of course, we'll move on to, what you see coming as we move through 2025. So if you could talk a little bit about this most recent quarter, that would be great. 

Devan Kaloo

Sure. And I will come as no surprise to anybody that's it's been a pretty surprising quarter. So given the backdrop at which we went into Q2, I think it's unusual that we've seen the markets rally as strongly as they have.

So if you're thinking about emerging markets, they were up over 12% in dollar terms of the quarter. And that's slightly ahead of a most, developed markets, which are just slightly behind that. And of course, the S&P was up about 11%. So pretty strong performance pretty much across the board. And one of the really interesting features here was that the dollar was quite weak.

So was down about 7% in terms of the quarter. And within that, we also saw in emerging markets quite a divergence in performance as well. So China was up about 2%, whereas EM ex-China was up over 17%. So some really big moves though. And that's surprising because when we think about some of the news flow over the quarter, it was pretty, pretty packed.

So I suppose just in terms of highlighting the key ones for us. The first one I would probably highlight is Liberation Day. And, really here, you know, with the US coming out to the beginning of the quarter and announcing significant increase in chives, that at one stage, look like we were going back to the 1930s in terms of the impact of tariffs in the US and therefore the rest of the world.

But quite clearly, there's been some backtracking on that. So one of the things that we've seen over the last month or so is more reasonable comments coming out to the US, and deal indeed, potential deals, looking like they could be struck. So perhaps tires will come in, circa 12, 13%. The one thing I would mention here, though, is that I still significantly higher, than what we had in the end of 2024, and indeed there may still be some subject to some change, but the sell off that we saw initially in markets was replaced by relief.

And that is one of the key things that drove markets higher in the second quarter. The second feature, which was really remarkable, is just the extent of the dollar weakness. Now, I've mentioned already the dollar down quite a lot in Q2, but against emerging markets was actually probably down, more than 7% versus many others. And I suppose we need to think a little bit about what was the drivers to that.

And the common explanation that people trot out is that it was represented the peak of U.S exceptionalism, which is another way of saying that it was a lot of uncertainty around U.S. policy making, and therefore, as a result, a lot of people hedging our dollar risk. We haven't really seen foreigners taking money out of the US bond or equity market.

But certainly, you've seen many people hedging, the dollar risk and therefore, as result, you see that dollar weakness coming to. And that is something that we need to think about because that's been a big tailwind for emerging markets over the quarter and may yet be a tailwind going forward. And the final point, probably just to highlight and just in terms of the backdrop has been geopolitics.

The short and brief war between India and Pakistan seems like a footnote now. But that was obviously one thing that impacted emerging markets, particularly in Indian markets. But of course, more broad than that or perhaps more significant than that, was the Iran, Israel, conflict on which the US eventually got involved in. And certainly that had significant consequences or potential significant consequences for regards oil price trade and many other risk issues.

And I suppose the surprise here again, has been just how markets have looked through that. So you saw a big move in the oil price. But then they came back down. But largely markets just shrugged off that conflict. And again, that represents what I can only best sum up as these the of risk on which was really rather remarkable given the headlines.

So that's probably it in terms of the overall themes that we've seen in emerging markets and indeed markets more broadly.

Tom Harvey

Thanks Devan and I, with that kind of surprising, quarter behind us now, what did that mean for for our emerging market strategies? 

Devan Kaloo

So for us, our strategies were slightly behind. So about, ten basis points behind, the market. And I suppose there's probably two things or maybe three things I would highlight here. The first is that in terms of what's not worked for us, China continues to be a headwind. And one of the issues here is that China obviously, was positive over the quarter and that was a positive performance, but it was weak relative to everybody else.

And within that, one of the issues that we saw was some of our consumption plays, selling off or not doing as well. And there were a number of features to that, but one was the rising competition. So one of the features of the Q2 was that one of the large e-commerce platforms, JD.com, announced that it was going to be spending a lot of money moving into other markets, taking on more competition, trying to gain market share.

And that had a, negative impact on the share prices for other companies, which we held, such as Meituan or Alibaba. But in addition to that, we've also seen, the rotation into some of the more tech names within China, where we've preferred Taiwanese Korean tech names. But that was a market, that was an area that, very well.

And I suppose the, final point is that, you know, the initial enthusiasm of China in Q1 gave way to a bit more not pessimism, but certainly slightly more, reserved views on the Chinese market as we wait to see what next in terms of Chinese policy makers as they work through, what the tariff impact is going to be.

So there was still an expectation the Chinese government needs to do more in terms of underpinning or supporting that economy, particularly around consumption. So you had the negative drag, if you will, from, China for us, perhaps compounded by the second issue, which was in India, some of our holdings, suffered in the, India, Pakistan, conflict in terms of the potential impact that would have on tourism and consumption more generally.

We think that's a short lived thing and will also come good. But certainly that was a drag. The other side of it, though, is we did enjoy, strong performance coming through from our tech names in Korea and Taiwan, which actually saw, strong rebound. And one of the features of that, of course, has been the recovery that we've seen in tech more broadly.

So cute. Q2 saw a number of of the big tech names in the US, reiterating their continued investment in AI and the need to get ahead of their competitors. So there was some concern about whether, investment would slow down. And the reason that has a big consequence for emerging market tech was that there many of the components and the chips that are made go into this I spend are coming from emerging markets.

But in addition to that, you actually saw some decent results coming through. So we saw, the rerating of quite a few tech names. We were also helped by the changes in Korea. One of the features of, the Korea market is it's been fairly volatile of late. One of the reasons for that was the attempted coup earlier in the year, which led to the subsequent, president's election, which concluded, in last month.

And as a result of that, one of the things that the government is committed to or the new government coming in is committed to is, corporate governance reform and the focus on the value up program. So you see, in the Korean market in particular, we wait quite substantially. So we were, beneficiaries of of some of that.

But overall, I would say that in a market has been particularly volatile. We've been keeping up with it. Which is generally a positive. The one bit I just conclude on on this particular topic is that, certainly post Liberation Day, we enjoyed our best relative performance, and it really was as, risk on trade increased, we gave back some of that relative performance.

Tom Harvey

Great. Thanks, Devan. And so it's been obviously a pretty, maybe volatile but pretty good year from an absolute standpoint for emerging markets. Will that continue? What do we expect as we move through the rest of 2025? Can these markets keep up? Does the US continue to, to ramp up? What are your expectations? 

Devan Kaloo

But we have been cautious, positive on emerging markets but still cautious because one of the risks that we think is not yet fully priced in or certainly the market seems to be looking through it, is whether or not the strength or the resilience of the US economy in the first half reflects front loading.

I because of the tariff concerns, orders were placed in first off to try and get ahead of those tariff impacts and as we work our way through the second half of the year, inventory levels start to get run down rather than continue to buy in the back of higher tariffs. And the second is that the higher tariffs actually start to feed through into inflationary impacts.

I think that's further compounded by the fact that, budget has been well, the big beautiful budget has been passed in the US, which actually, as you know, increases the the fiscal deficit quite substantially for the US. So all of that does create some greater uncertainty, we think, and potential risk of weakness, from the US economy, which obviously sets the tone for a lot of what happens in the rest of the world.

So I suppose if I was, trying to sum up on, you know, the three points are for the outlook for emerging markets, as I said, we'll construct have on the outlook, albeit slightly, cautious. And the three points I would make here is first and foremost the dollar. We still see an environment where the dollar struggles.

And the reason for that being we see no change in the policy uncertainty in the US and indeed deficit deterioration perhaps makes even more likely that you see a weaker dollar. And as a consequence, that's a really good tailwind for emerging markets. And, the tailwind feeds to into I suppose the second point, which is that relative to many other developed markets, areas such as Europe or indeed the US emerging markets are actually seeing positive earnings revisions and the earnings revisions are coming through in a variety of ways.

One is, tech has proved to be more resilient than people expected. The second is that the industrial component of Em is also doing pretty well, whether that's from the electrification story or the defence story. There's a number of, positive tailwinds. And then the third thing is that because of the dollar weakness, emerging market currency, earnings, local currency earnings obviously look better.

With the prospect then of, the scope for interest rate cuts in the second half. We think actually the these, these earnings could be held up, hold up pretty well relative to the markets in the US. So there's a positive earnings story we think going into the second half. And the final point I'd make just in terms of being constructive on emerging markets would be valuations.

So despite year to date emerging markets outperforming the US by about ten plus percent, that's still very cheap relative to history but also relative to the US. So while we've seen an element of rerating, we do think that's underpinned by some decent fundamentals. And therefore see the valuations still looking pretty compelling. So overall, our view is still positive on emerging markets.

But as I mentioned earlier on that potentially is a slowdown in the US coming, which does have some negative impacts overall for global growth. Therefore, emerging markets. So we would be a little cautious. 

Tom Harvey

Great, thank you Devan. That feels like a good place to bring the podcast to a close Devan, thank you for joining us today. 

Devan Kaloo

Thank you.

Tom Harvey

And thank you to everyone who took the time today to listen in. If you enjoyed today, then please download our other podcast from our website or wherever you normally get your podcasts.