2 November 2025

Potus 47 now has returned from his Asian visit: unsurprisingly using superlatives to describe the trade agreements reached with Japan, Korea, and China. Upon taking office, Mr. Trump pledged to impose high tariffs against countries with large bilateral trade imbalances, espcially those conducting “unfair” trade practices with the USA.

Potus 47 now has returned from his Asian visit: unsurprisingly using superlatives to describe the trade agreements reached with Japan, Korea, and China. Upon taking office, Mr. Trump pledged to impose high tariffs against countries with large bilateral trade imbalances, especially those conducting “unfair” trade practices with the USA.

Not surprisingly, the consensus opinion was Emerging Markets would underperform. Indeed, the chart above illustrates many EM nations run large trade surpluses with the USA. Even more problematic, the US has low export/import ratios with many EM countries, especially in Asia, suggesting the existence of non-tariff barriers to American exports. The impostion of high tariffs should pose meaningful economic risks in these countries (next Chart).

Of course, all countries are not the same: vulnerability appears gretest in Mexico, Vietnam, Taiwan, Korea, Thailand, and Malaysia, and less so in China, India, Indonesia, etc, (next Chart).

My view differed from the consensus: I advocated remaining overweight EM markets with large domestic economies which could offset the risk posed by tariffs. Of course, Emerging Markets have outperformed significantly this year. While trade talks continue with Mexico and China, the new trading regime is taking shape, and most countries will face tariffs of 15-20% — far less than originally feared. Of course, India, China, and Brazil confront far more punative levies, although I expect these rates to decline towards the level faced by other EM economies in coming months.

As the dust settles, can Emerging Market outperformance continue? Yes, indeed, with the US Federal Reserve set to lower interest rates, the global environment has become more favourable. Nevertheless, I would continue to focus on countries with large domestic economies — China, India, Brazil, Indonesia, etc. Taiwan and Korea may continue to benefit from strong technology demand. Mexico, Vietnam, and smaller markets may lag. As EM nations pursued differing FX policies during US trade talks, currency performance may differ widely in the period ahead.

How Are Emerging Nations Coping?

Emerging Markets have remained resilient, in part, as local demand have remained healthy in many countries. Indeed, consumer spending has been solid, especially in key large countries, e.g. India, Indonesia, Philipppines, Poland, and Turkey (Chart above). Others have fared less well: Mexico, Korea, and Taiwan.

Meanwhile, despite the uncertaintyabout tariffs, exports have remained resilient in Taiwan (tech), Philippines, Thailand, and even Mexico and China. Again, the pattern is not uniform: exports in Poland, India, Brazil and South Africa have struggled (although recent performance has improved). Clearly, countries are learning to cope: redirecting supply chain, growing intra-Asia trade, and identifying new trading partners.

It’s worth observing, US bilateral trade deficits have continued to widen with most EM countries (China is an exception), despite the imposition of tariffs (Chart above). As America’s external imbalance largely reflects the nation’s insatiable appetite for foreign products, I expect the US trade deficit to continue to expand. Unfortunately, this raises the possibility of addition trade sanctions in the future.

Global Environment Turns Benign

The global environment has also improved for EM investing following the US Federal Reserve’s decision to begin lower interest rates. As a result, the overvalued US dollar is likely to weaken in the period ahead — another EM-positive external factor (Chart above).

In addition, inflation is likely to remain low (or decline further) in the most emerging economies. On the other hand, US price rises may remain sticky around 3% in the period ahead, reflecting higher tariffs (Chart above). Therefore, the pathway towards low or declining EM interest rates is quite clear in most EM nations. To be sure, financial markets expect the Fed to lower US interest rates substantially towards 3%. If US inflation remains stubborn, however, there is room for disappointment.

Fiscal Crisis: Emerging Markets Better Positioned

A major investing wildcard is if or when financial markets will focus on the relentless and unsustainable build-up in world-wide public sector debt. To be sure, almost every country has experienced a sharp hike in government liabilities since the Covid pandemic (Chart above). Fortunately, the rise in debt, and the resulting level of debt/GDP, has been far less in most EM nations compared to the USA. Of course, China, Brazil, and South Africa are important exceptions. EM nations’ healthier public sector balance should help weather any potential global fiscal crisis (which I expect at some point).

Valuations Favour Emerging Markets

The Chart above reveals that valuations are far more attractive in most Emerging Markets compared to the USA. Following recent rallies, Taiwan and Korea appear overvalued. Meanwhile, many markets seem cheap compared to their historical pattern.

EM FX: Go Your Own Way

Normally, one would expect the currencies of countries facing higher tariffs to depreciate in order to offset lost competitiveness. However, each EM nation chose their own course; many allowing their exchange rates to appreciate in the hope of negotiating a better trade deal with the USA (Chart above).

Potentially, this sets the stage for an equally divergent FX performance in the coming period. The following Chart illustrates the degree of over/undervaluation of individual EM currencies. I expect the Mexican peso to weaken considerably, as MXN is overvalued and tariffs pose a considerable economic risk.

Likewise, TWD and THB are vulnerable as both have appreciated, and are now overvalued. On the other hand, China has kept CNY stable during trade talks. If progress stalls, however, the PBOC may allow CNY to slide (perhaps a lot). The Brazilian Real, The Korean won, and the Indonesia rupiah have already declined, and are now undervalued. Further declines, therefore, may be limited.

While Japan will face 15% tariffs, the Japanese yen is already very undervalued. In order to prevent the imposition of additional trade sanctions, JPY is likely to appreciate, and could be the world’s strongest currency in the period ahead.