Global Growth Turns Investors Focus After EM's Roaring Start

Emerging-market traders are increasingly focused on the global economic outlook and the trajectory of the U.S. dollar after assets across developing countries delivered surprisingly strong performances during the early months of Donald Trump’s presidency.

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During Trump’s first 100 days, financial markets experienced major turbulence, with the U.S. dollar falling to a three-year low and American stocks and bonds facing declines. Yet, emerging markets largely prospered. Local-currency bonds posted impressive returns, a key emerging-market stock index outperformed the S&P 500, and an emerging-market currency index experienced its strongest rally since 2017.

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Now, with the dollar weakening due to growing fears of a U.S. economic slowdown, investors believe the future of emerging-market assets hinges on how much economic damage Trump's trade policies might inflict.

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This uncertainty was a central theme last week at the spring meetings of the International Monetary Fund (IMF) and the World Bank, where government officials and investors gathered. During these meetings, the IMF downgraded its 2025 global growth forecast to 2.8%, down from the 3.3% it had predicted earlier this year, citing concerns over the wide-ranging impact of Trump’s tariffs.

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According to Luis Estrada, a strategist at RBC Capital Markets in Toronto, emerging markets could benefit from a weaker U.S. economy—but only to a point. Speaking at the IMF meetings, Estrada explained, “The ideal scenario for emerging markets is a U.S. slowdown without an actual recession. A weaker dollar is almost certain, and that’s pushing people to diversify away from dollar-based assets.”

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Since Trump assumed office on January 20, a key emerging-market stock index has gained 3.2%, while the S&P 500 has dropped 7.5%. Markets in Latin America, South Africa, and India have led the rally. Meanwhile, many emerging-market currencies have strengthened, compared to a 7% decline in the dollar over the same period.

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“Emerging markets have recently shown they can manage through a more difficult environment,” said Pierre-Yves Bareau, head of emerging-market debt at JPMorgan Asset Management in London. Bareau currently favors local-currency bonds, which have risen 3.5% so far this year—the best start to a year since 2019.

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The strong performance in emerging markets has raised hopes that these economies might reclaim a portion of the $211 billion that investors have pulled out since 2022, including around $30 billion just this year.

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“Emerging markets have a chance to keep outperforming, and that could attract more investment flows,” said Jeff Shultz, an economist at BNP Paribas. “But it really all depends on what unfolds over the next several months.”

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A survey conducted by JPMorgan Chase & Co. during the IMF meetings revealed that most investors expect the dollar to continue weakening through the end of 2025, according to a note from Joyce Chang, the firm’s head of research.

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“The chatter about a weakening dollar is definitely getting louder,” said Gorky Urquieta, a portfolio manager at Neuberger Berman.

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This outlook has encouraged money managers to seek assets that would benefit from a softer dollar, as well as opportunities in countries that might be able to negotiate favorable trade deals with Trump’s administration. Alejandro Cuadrado, global head of foreign exchange at BBVA, mentioned that his team is maintaining light and tactical positions and favors the Brazilian real, Mexican peso, and Peruvian sol.

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Another group of investors is wagering that if the U.S. economy manages to avoid a deep downturn while the dollar stays weak, emerging-market central banks could have room to lower interest rates.

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Lower borrowing costs would, in turn, make local bonds and stocks more attractive. Goldman Sachs strategists led by Kamaksha Trivedi wrote in a report on Thursday that markets should be ready for interest rate cuts in regions like Asia, Chile, and the Czech Republic—areas that typically show resilience during global turbulence.

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For Malcolm Dorson, a senior portfolio manager at Global X Management Company in New York, countries such as India, Argentina, and Vietnam stand out as potential winners if they can strike new trade agreements with the U.S.

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“In a world with a weaker dollar, emerging markets are positioned as some of the biggest beneficiaries,” Dorson said.

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