US policy changes are triggering a global economic reset. For emerging markets (EM), that’s creating a triple whammy: higher tariffs may damage EM trade; US immigration policy will impact remittances from overseas workers to EM countries such as El Salvador and Senegal; and US spending cuts have already reduced the flow of overseas aid, hurting primarily frontier markets.
Great-power rivalry creates further problems in the reset: for many EM countries, both the US and China are big customers, and placating one without riling the other seems a near-impossible task. While the recent temporary 90-day tariff reductions have eased tensions and boosted markets, uncertainty remains high—and the underlying global-reset strategy is likely here to stay.
Meanwhile, EM exports surged early in the year as customers stockpiled ahead of potential tariff increases. That trend may continue to the end of the 90-day negotiating windows—but there will be a meaningful step-down in activity if and when the tariffs finally bite. We expect below-trend growth in EM this year, with risks evenly balanced largely depending on tariff outcomes.
Despite the array of negatives, there are some likely positives for EM from the changes too. And considering EM’s vast range of securities, coupled with a rapidly changing economic backdrop, we see several opportunities for active managers.
A Weaker Dollar Helps Emerging Markets
Recently the relative strength of the US economy has boosted the US dollar. But now, as investors perceive the vulnerabilities of the US economy from the proposed new tariffs, and as data suggest an incipient slowdown, the US dollar is potentially starting to roll over from a historically high level (Display).
