In the Face of Tariff Turmoil, Emerging Markets Are Facing a 'Wrecking Ball'

The escalating trade tensions fueled by the Trump administration's tariff policies are deepening fears among investors that the most vulnerable assets — particularly those in emerging markets — could face further losses in the near future.

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Strategists at Societe Generale SA are warning that most emerging-market (EM) currencies are poised to weaken. They anticipate a “modest” depreciation in China’s yuan and continued weakness for South Africa’s rand and currencies across Latin America.

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Their outlook suggests that, despite some recent resilience in emerging markets, the impact of ongoing geopolitical and trade shocks is far from over. “The wrecking ball still underway in EM FX, but will slow,” wrote a team of Societe Generale analysts led by Phoenix Kalen, based in London.

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Meanwhile, Goldman Sachs strategists are projecting that a reversal in the dollar’s strength may benefit other major developed economies more than EM currencies. The implication is that the fallout from tariff-related disruptions will continue to affect emerging markets disproportionately, as the global financial system rebalances in response to Washington’s aggressive trade maneuvers.

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Although the MSCI Emerging Markets Currency Index managed to end the week at its highest level in five months, investor sentiment remains notably bearish. Fund managers are expressing growing caution, preparing for a prolonged and potentially intensifying trade war. Last week, the Colombian peso and Indonesian rupiah experienced the sharpest declines among major EM currencies, underscoring the fragility of these markets amid global uncertainty.

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“Even if the worst-case scenario doesn’t materialize now, the current uncertainty is already causing damage,” said Tamas Cser, who helps manage roughly $2.8 billion at Hold Alapkezelo Zrt. in Budapest. According to Cser, investor appetite is already cooling across the globe as market participants weigh the potential consequences of the trade war’s next chapter.

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Equity markets in emerging economies also suffered. The MSCI Emerging Market Index dropped by 3.7% over the week, reflecting widespread concern among investors. Political instability in countries such as Turkey, Indonesia, and South Korea throughout the year has only heightened these concerns, reinforcing the perception that EM investments are increasingly risky.

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Turkey stands out as a case study of how quickly confidence in an emerging market can erode. Morgan Stanley revised its forecast for the Turkish lira this week, expecting the currency to weaken further by the end of the year.

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The bank also advised against engaging in carry trades involving the lira, a popular but increasingly risky strategy. Analysts from Morgan Stanley, including Hande Kucuk and Arnav Gupta, noted that the latest global risk-off episode tied to U.S. tariffs may have depleted Turkey’s foreign-exchange reserves by another $10 billion — compounding last month’s losses during a separate political crisis.

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They added that foreign investor exposure to Turkish assets is likely down even further, meaning the key factor in shaping Turkey’s reserves outlook going forward will be domestic demand for foreign exchange.

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While many investors remain wary, some are seeing opportunities amid the turmoil. Cser of Hold Alapkezelo said his firm used the recent selloff as a chance to acquire more Polish stocks. He believes that Trump’s confrontational stance will encourage European nations to ramp up defense spending, which could ultimately benefit certain European companies.

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In London, fund manager Malin Rosengren of RBC BlueBay offered a broader geopolitical view. She believes Trump’s bold tactics could serve as a model for other political leaders around the world, paving the way for more aggressive and unpredictable moves in global politics — and, by extension, markets.

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“No doubt we will be seeing more instances across EM of strongman politics testing the limits of the new world order,” Rosengren said. She believes that, going forward, investors will become more focused on underlying economic fundamentals, rather than reacting to political shocks alone.

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In summary, while some asset classes in emerging markets are showing signs of strength on the surface, the underlying mood among investors remains cautious, if not outright defensive. The Trump administration’s protectionist stance is reshaping how money flows across borders, amplifying volatility and forcing a rethink of risk in emerging markets.

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As uncertainty continues to cloud the global outlook, investors are grappling with whether the recent moves represent temporary dislocation or the early stages of a much deeper transformation.

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