Emerging Markets (EMs) are in a stronger position than they were in 2016/17, with resilient growth, larger foreign exchange reserves, and central banks ahead of the curve. While vulnerabilities remain, especially with US policies under the Trump administration, returns in 2025 are still expected to be promising. The growth of the US economy and the concept of US exceptionalism are not entirely detrimental, although the risks posed by tariffs will likely impact EMs, particularly from the second half of 2025. These effects, however, are expected to vary across different countries and asset classes.
In terms of investment, there is a marked preference for external debt over local debt. The expected return on external debt in 2025 is close to 7%. Meanwhile, US credit markets offer a substantial spread anchor, with several ratings buckets, including B and CCC segments, still perceived as underpriced. Within the BB segment, some countries, such as Morocco, Serbia, and Oman, may be upgraded to investment grade within the next 12 to 18 months.
However, local debt in Emerging Markets is likely to be more vulnerable, with expectations for low single-digit returns. Among European markets, Central and Eastern Europe (CEE) rates are expected to benefit from lower Eurozone core rates. Latin American rates will face more risk premiums, and in Asia, central banks have room to cut rates if necessary. In foreign exchange, EM currencies will likely struggle against the US dollar but are expected to perform better relative to G9 currencies. Among the favoured currencies are the South African rand (ZAR), Turkish lira (TRY), and Brazilian real (BRL), which are expected to outperform the Mexican peso (MXN).
While challenges exist, the outlook for Emerging Markets remains positive, with strong growth and investment opportunities in 2025.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
