Emerging markets need to produce growth expansion
In the first quarter of 2025, the MSCI Emerging Markets index has shown a significant rise, with a 13% increase in local currency terms since the beginning of January[1][2]. This upward trend continues in US dollar terms, with the index up by approximately 16%[2].
The strengthening of emerging markets (EM) can be attributed to a weaker US dollar, a trend that tends to benefit EM economies[1]. A weaker dollar eases financial conditions in EM economies, reduces debt servicing burdens for countries with dollar-denominated debt, and boosts commodity demand, which many EM countries export[1].
The differential between the MSCI Emerging Markets' forward p/e ratio and that of the USA is wider than it was a decade ago[1]. This widening gap suggests that investors are expecting stronger earnings growth in EM compared to the US[1]. JP Morgan forecasts a further acceleration of earnings growth to 17% this year for the MSCI Emerging Markets[1].
Earnings growth is expected to lead to a virtuous circle of more investment, more spending, and more growth in emerging markets[1]. However, it's important to note that the performances of individual EM countries can vary significantly due to the vast differences between their economies[1]. For instance, India and most of Southeast Asia have been notably weak in the emerging markets[1].
On the other hand, Hong Kong-listed shares, Korea, Eastern Europe, most of Latin America, and the Middle East (excluding Saudi Arabia) have all been fair to outstanding in the emerging markets[1]. It's worth mentioning that mainland China A share market performance has been unimpressive[1].
The relationship between the US dollar and EM asset performance is influenced by the broader global economic context, including the divergence of fiscal and monetary policies between the US and other economies, the overall health of global trade, US tariff policies, and inflation trends[1][3].
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[1] Source: Investopedia [2] Source: Bloomberg [3] Source: Financial Times [4] Source: Our Website Magazine
- With the MSCI Emerging Markets index exhibiting a 16% rise in US dollar terms since January and a widening gap in forward p/e ratio compared to the US, investors may be increasingly attracted to finance opportunities and investing in emerging markets.
- The strengthening trends in the emerging markets, such as reduced debt servicing burdens for countries with dollar-denominated debt and expected higher earnings growth, can encourage more investment and spending, potentially leading to further growth in these economies.
