Emerging markets gains in the cards as Trump's tariffs challenge U.S. exceptionalism

Developing economies could emerge triumphant from the fallout in global markets due to President Donald Trump’s tariffs, with the U.S. exceptionalism trend — which has been to the detriment of emerging markets — challenged by the charges.

And although sources warned there's probably more short-term pain to come for emerging markets, there are bright spots on the horizon. Emerging Europe and South America-based countries are set to fare relatively well, while investors are watching closely for China's reaction and whether the country's authorities will make changes to mitigate tariff-induced risk.

Trump unveiled tariffs April 2 on imported goods, including from Europe (20%), the U.K. (10%) and Saudi Arabia (10%).

Asia-located countries suffered the most due to their proximity to and links with China — itself subjected to a 54% tariff on President Trump's so-called Liberation Day but since then ratcheted up to 145% — which saw Vietnam and Cambodia punished with a 46% and 49% charge, respectively.

The founder of one London-based global macro hedge fund said: "We need to see how the tariff story plays out, but what seems to be the case right now is that the focus is clearly on China, and so Asia overall is the most challenged region.”

The S&P 500 index plunged more than 10% following that April 2 announcement, while the U.K. FTSE 100 dropped 1.6% on April 3 and fell further over the next week.

The hedge fund founder said while the volatility was to be expected, “I don’t think anyone expected the scale or extent of the tariffs that Trump has unleased.”

But as U.S. Treasuries then started to suffer, with dislocations across the traditionally safe-haven asset, the U.S. on April 9 paused all tariffs for 90 days except those on Chinese goods, upping the ante to 145% after a retaliatory charge from China. The S&P 500 surged to a 9.5% gain following the pause, while the FTSE 100 also staged a recovery.

While sources said the unravelling of U.S. markets due to the tariffs will bolster select emerging markets, which have been the underdogs of the investment world for years amid flights to safety, the case for active management is bigger than ever.

Going into 2025, “the obituaries for EM had been written, with unattractive levels of stock market concentration and clear uniformity of consensus thinking,” said Kunal Desai, co-portfolio manager for global emerging markets equities at GIB Asset Management, which has more than $4 billion in assets under management.

“The global trade landscape is growing increasingly volatile, with escalating tariffs no longer confined to a U.S.-China dispute but extending across multiple regions,” and broader risks such as supply chain disruptions remain unchanged, Desai said.

Recession fears may “set off a broad risk-off mood ... once volatility subsides, EM could ultimately emerge as a long-term winner,” Desai said.

Desai said emerging markets equities flows “could be undergoing a structural shift, with geopolitical frictions and trade disputes feeding into an ‘anti-America’ narrative that encourages foreign investors to repatriate capital.”

Non-U.S. investor holdings of U.S. equities are at all-time highs of 18%, he said, and any reversion to pre-COVID-19 levels of 15% could result in up to $1.7 trillion in outflows. “A combination of ‘push’ factors from U.S. policy uncertainty and ‘pull’ factors from attractive EM fundamentals may redirect this capital toward emerging markets,” Desai said.

Other investors also highlighted improved fundamentals in emerging markets as a ‘pull’ factor, including restructurings of debt in the weakest sovereigns, such as Ukraine, Ghana and Sri Lanka, and improvements in Turkey, Argentina and Egypt, too.

Similarly Ashmore Group, an emerging markets specialist with $48.8 billion in AUM, said that “the world’s largest consumer market turning protectionist will be bad for global growth and damaging for export-oriented EM economies in the short term,” said Gustavo Medeiros, head of research.

“However, the unpredictability of Trump’s policymaking has caused most investors to rethink their heavy exposure to U.S. assets. This trend has actually supported EM outperformance vs. the U.S. for most of this year so far,'' Medeiros said.

In Ashmore’s view, the trade policies, “if not significantly softened, will damage the U.S. economy more than the rest of the world. So while growth may be lower globally than we expected, diversification into EM assets is more important than ever,” Medeiros said.

The appropriateness of the grouping of emerging markets countries has been under discussion for years due to the differences between these economies, and there’s increased importance this time around when considering where to park assets, sources said.

South America in particular was highlighted as a bright spot, being “relatively insulated from tariffs due to their limited trade exposure to the U.S., as well as in frontier markets that have recently completed debt restructurings,” said Thierry Larose, portfolio manager at Vontobel, which has a total 225.9 billion Swiss francs ($269.1 billion) in AUM.

Central European economies are also expected to benefit from the eurozone recovery that’s been underway for some time. On April 11, BlackRock’s Larry Fink pointed to investments in Europe as one of the most promising opportunities emerging now from the current moment of heightened uncertainty during an earnings call.

Robert Nelson, portfolio manager for Franklin Templeton’s fixed income emerging markets debt team, said the firm generally sees “more value in the emerging CEEMEA (Central and Eastern Europe, Middle East and Africa) and LatAm regions compared to emerging Asia, in both the hard currency credit and local markets.”

Executives were not surprised to see volatility in emerging markets debt spreads and EM currencies, Nelson said, reflecting the tariffs, weaker U.S. growth outlook, commodity prices adjustments and ongoing uncertainty priced into asset values.

“With the reset in prices, even after the partial retracement following the 90-day pause, we have seen some improved value emerge, although we are cautious when it comes to layering-on additional market beta in what remains an unpredictable investment environment,” Nelson added. Franklin Templeton had $1.58 trillion in AUM as of Dec. 31.

And Varun Laijawalla, emerging markets equity portfolio manager at Ninety One Asset Management, which has £130.2 billion ($168.1 billion) in AUM, singled out the United Arab Emirates.

“The UAE offers uncorrelated investment opportunities as it moves in the opposite direction of global protectionism. It has lowered trade barriers through multiple comprehensive economic partnership agreements and introduced the Golden Visa Program to attract skilled professionals. These pro-growth policies are driving immigration, economic activity, and investment opportunities,” he said.

For Gemcorp Capital, an emerging markets manager, a “redirection of trade flows and, eventually, production capacity ... should present some attractive investment opportunities,” said Parvoleta Shtereva, partner responsible for the investment portfolio. Executives believe “that as the world realigns EM will rise as an investment destination with generally lower debt, higher growth and favorable demographics. These structural trends will persist and will be harder to ignore,” she said.

As for intra-emerging markets trade finance — an area of expertise for Gemcorp — tariffs have afforded the opportunity “to fund the same deals we were six months ago at a higher yield for the same or similar risk, due to the broader macro noise. Other sectors that will remain attractive are essential infrastructure, commodities, energy and energy transition, critical minerals,” Shtereva said. Gemcorp does not disclose its AUM.

Then there’s the impact on China itself. Sources expect the situation to trigger changes in the country, with “work to mitigate these effects by shifting its growth model toward domestic consumption and diversifying its (China’s) export markets,” Vontobel’s Larose said.

GIB’s Desai agreed that the “long-term implications of escalating trade tensions could lead to a fundamental shift in China’s economic model.

If Trump's tariffs persist, China's reliance on exports and manufacturing could weaken, pushing the country toward a more consumption-driven economy, as seen during the early 2010s. Similar transitions occurred in 2021, 2009, and 2002, highlighting China’s ability to adapt to external shocks by strengthening domestic demand,” Desai said.