Emerging markets (EMs) have faced a challenging landscape in 2024, plagued by underperformance and dwindling investor confidence. The dominance of US equities, buoyed by a strong dollar and political developments such as Donald Trump’s election, has further marginalized these markets. This article explores the key factors contributing to EM struggles, potential shifts in 2025, and the broader implications for global investors.

2024: A Year of Struggles for Emerging Markets

Emerging markets have faced persistent underperformance across asset classes. According to Bloomberg data:

Equity Underperformance: The MSCI EM Index rose less than 5% in 2024, lagging the S&P 500 for the 11th time in 12 years. US equities provided a total return of 430% over the last decade, dwarfing EM gains.

Currency Depreciation: A strong US dollar has led to widespread currency devaluation in EMs, with only the South African rand and Malaysian ringgit gaining value against the greenback. Many currencies fell over 10%.

Bond Market Challenges: Despite initial optimism, local-currency EM sovereign bonds returned just 2% in 2024, underperforming US corporate high-yield bonds, which delivered 8%.

Trump’s tariff threats against nations like China and Mexico have compounded these struggles, introducing additional uncertainty for EM assets.

Investor Sentiment: A Shift Away from EMs

1. Investor interest in EMs has waned significantly. Global funds are increasingly favoring US equities over EM assets. Data from EPFR Global shows:
2. EM-dedicated bond funds have experienced $23 billion in outflows in 2024.

Historically, shifts in liquidity toward US equities have coincided with weaker EM returns.

The “signal” for many investors, as highlighted by UBS’s Barry Gill, is clear: diversification outside the US appears less rewarding, given the consistent underperformance of EM stocks and bonds.

The Road Ahead: Is Recovery Possible?

Despite the current struggles, some experts believe EMs could regain their allure in the future. Key considerations for 2025 include:

1. Trade Wars and Policy Risks: Trump’s threats of tariffs and restrictive trade policies could destabilize developed markets, creating opportunities for EMs to regain footing.
2. Valuation Gaps: US equities are perceived as overvalued, prompting calls for diversification. Investors like Wim-Hein Pals of Robeco Institutional Asset Management suggest that putting all resources into the US market in 2025 may not be prudent.
3. Historical Perspective: Between 2000 and 2010, EMs outperformed developed markets significantly, driven by China’s economic boom and globalization. Advocates like Franklin Templeton’s Dina Ting argue that these cycles could return.

A Cautious Optimism for EMs

While the immediate outlook for EMs remains clouded by political and economic uncertainties, there are still reasons for cautious optimism. Factors like rising valuations in US equities, trade policy adjustments, and potential stabilization in EM currencies could create opportunities for long-term growth.

For investors seeking exposure to EM growth without direct investments, alternatives like multinational corporations with significant EM operations, such as Coca-Cola or Nvidia, have gained traction.

At Cresco Capital, we continuously monitor global market dynamics to provide timely insights and strategies. Stay connected for updates on emerging markets, investment opportunities, and macroeconomic trends shaping the future.