Plenty of Manufacturing Will Stay Put in EM
Trump’s policies are designed to bring manufacturing back to the US. Yet whatever incentives may be provided to US companies, we think it’s unrealistic to expect many types of low-cost manufacturing to return to America.
Clothing, toys and even many electronic components are still likely to be more cost-efficient to produce outside the US. Higher tariffs won’t always change the competitive math. Investors can look for EM companies in industries that are currently perceived as potential victims of new US policies but might emerge unscathed. And countries like India, Vietnam and Mexico could be beneficiaries of Trump tariffs, offering new opportunities for EM investors.
Is More China Stimulus Coming?
We don’t know the answer to that question. Chinese policy is always hard to predict. But here’s what we do know: First, China announced huge fiscal and monetary stimulus in 2024, amounting to nearly 6% of GDP. Second, in the past, big Chinese stimulus packages have spurred Chinese stock-market rallies, which have also lifted EM returns more broadly.
In fact, fiscal stimulus lifted Chinese stocks in the third quarter of 2024, when they were the best performers globally. Fiscal and monetary measures from last year are still filtering through to the economy and companies. To be sure, China’s economy is still sluggish. But any new stimulus package in 2025 could dramatically change the dynamics for Chinese equities—and for EM stocks more broadly.
Most EM Countries—and Companies—Aren’t in China
Given its dominance on the world stage, investors often conflate China’s fortunes with all the other EM countries and companies. We think that’s a mistake.
EM investors can’t ignore China, as it is the world’s second-largest economy, with a 26.2% weight in the MSCI EM Index as of the end of 2024. But the universe of companies in the MSCI EM benchmark is diverse, from large weights such as India and South Korea to growing players like Saudi Arabia and smaller benchmark constituents including Brazil, Greece and Poland. Investors can even find hidden gems in off-benchmark countries such as Kazakhstan.
Companies outside China may be less exposed to tariff risks if the US-China trade war escalates. Some opportunities in EM companies, from enablers of artificial intelligence to beneficiaries of South Korean reform, are less likely to get hit by US moves. And casting a wide net can create a diversified collection of EM stocks that helps reduce regional risks in parts of the developing world, particularly as US policy impacts spread.
EM Is Still a Great Source of Alpha
We understand that EM market returns may come under pressure in 2025. Yet EM equities have historically been a very good source of alpha—or above-market returns—for skillful active investors (Display).
