Emerging Market (EM) equities are off to a strong relative start in 2025, outperforming Developed Markets (DM) after years of lagging. As investors reassess U.S. exceptionalism and seek broader diversification, EM equities should not be overlooked as potential portfolio diversifiers. The below factors suggest the case for EM equities is improving.
Firstly, solid EM fundamentals. The growth gap between EM and DM is widening. The IMF’s April 2025 forecast now sees advanced economy growth at just 1.4%, while EM to grow by 3.7% in 2025. MSCI Emerging Markets’ earnings growth is expected to rise to 17% this year, up from 10% in 2024. Valuation also remains attractive, with MSCI EM trading at 12.4x price to earnings, near its 25-year average.
Secondly, market leadership has shifted from hard tech to soft tech. EM tech stocks, led by Chinese internet firms, are fuelling the rally. Easing regulatory risks are driving an acceleration of AI investments and innovation in China. Select semiconductor manufacturers in Taiwan and South Korea are also set to benefit from accelerating demand tied to AI. The U.S.-China tariff pause meaningfully improves the outlook.
Lastly, we believe the U.S. dollar will likely weaken after a prolonged period of strength since 2010, which aligns with the interests of the current U.S. administration. A weaker U.S. dollar can further improve debt-servicing capacity and commodity-linked revenue throughout the EM region.
Collectively, the above factors suggest that EM may now be more likely to translate into investment performance than in the past.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 738 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 623 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
