The reciprocal tariffs introduced by U.S. President Donald Trump on April 2, 2025 – which he titled “Liberation Day” – drove global stocks significantly lower, and the emerging-market equity benchmark had its biggest one-day decline in at least five years, falling 10%. The scale, breadth and methodology of the tariffs has confused investors and forced companies to delay investment decisions. Significant declines in the U.S. dollar, U.S. equities and Treasuries prompted Trump to largely reverse himself on many of the extreme tariffs, at least temporarily, and emerging-market stocks have more than recovered the losses sustained in early April.
The direction of the U.S. dollar tends to be very important for emerging markets, and the greenback has been overvalued for some time. Investors are now shifting assets from the U.S. amid perceptions that the U.S. is losing some of its attractiveness as a safe haven and a belated recognition that Trump’s approach is likely to weaken the U.S. dollar.
Emerging markets have outperformed the U.S. so far this year and it is conceivable in our view that this trend continues. The U.S. as a percentage of global market capitalization remains near its December 2024 peak of 70% in December 2024 (up from 40% 12 years ago), suggesting that valuations are high as economic growth slows.
After 13 years of U.S. stock-market outperfromance, and with economic growth now slowing in the U.S., emerging-market equities look attractive. A weaker U.S. dollar is clearly positive for emerging-market equities, and with emerging-market valuations still half those in the U.S., there is strong potential for continued outperformance.
Most emerging-market countries, with Mexico an important exception, have relatively low exposure to U.S. tariffs. For China, exports to the U.S. represent a mere 2.5% of GDP. However, it would appear that Mexico has come out well in terms of the tariffs and has benefited from the stricter controls on Asia.
More recently, it appears that Trump has begun to refocus the trade war away from one characterized by the indiscriminate imposition of tariffs everywhere to one focused on isolating China. While it seems unlikely that other nations will help form an anti-China coalition, America could well be successful in limiting China’s indirect exports to the U.S. A trade deal between China and the U.S. is not at all certain, but would in our view be beneficial to both countries. Currently most economists seem to view the short-term pain of the trade war between the U.S. and China as being higher for the U.S. as finding new suppliers for some of what China exports is difficult. China has navigated the trade war well since it started. The country’s trade surplus has more than doubled in the past five years, as China diversified exports among emerging markets and increased exports of high-value products. Furthermore, China is also likely to focus much more on domestic demand.
Emerging markets – Recommended sector weights
Note: As of May 31, 2025. Source: RBC GAM
MSCI Emerging Markets Index Equilibrium
Normalized earnings and valuations
Note: The fair value estimates are for illustrative purposes only. Corrections are always a possibility and valuations will not limit the risk of damage from systemic shocks. It is not possible to invest directly in an unmanaged index. Source: RBC GAM
Deepseek, the Chinese artificial-intelligence (AI) company, has showcased the country’s technological prowess after the U.S. took steps a half decade ago to arrest China’s technology development. China, exploiting its enormous number of engineering and math graduates, has emerged as a leader in a wide range of technologically advanced products encompassing electric vehicles, batteries, drones, high-speed railway and 5G communications.
Another major emerging-market power, India, has benefited from economic reforms and robust capital expenditures, which are ramping up as government expenditures on infrastructure slow. Moreover, valuations have come down from elevated levels. Given that the Indian economy tends to be domestically focused, the market is starting to look attractive again. India’s stock market had significantly underperformed China’s as of the end of March of this year, but valuations were still higher.
The outlook for Latin America is improving, as the region emerges from a cycle of left-wing governments that in many cases are being replaced by centrist and right-wing governments. Additionally, Latin America is well placed on trade given that U.S. tariff policy looks to favour the Americas. Latin American markets remain highly competitive in manufacturing, benefit significantly from a weaker U.S. dollar and are attractively valued.
Among sectors, Information Technology has benefited from significant capital expenditures driven by AI. Questions remain as to whether AI-related companies will get a return on their capital. It may make sense to move away from companies that supply the AI industry to more direct beneficiaries in the areas of services, software and the internet.
We have always preferred emerging-market sectors that benefit from domestic consumption and the expanding use of financial services in emerging markets. Domestic sectors will be insulated from tariffs and are likely to receive policy support. The Financials sector has tended to outperform Information Technology when the U.S. dollar weakens, and emerging markets as a whole generally outperform when borrowing is on the upswing. A weaker U.S. dollar makes it easier for emerging-market interest rates to come down as there is less need for emerging-market central banks to support their currencies. Finally, the Financials and Consumer Staples sector in emerging markets look cheap relative to their median valuations, supporting our overall domestic preference.
A U.S. bear market, should one occur, will likely result in emerging-market weakness. But timing markets is difficult at best. What we can say is that emerging-market valuations are attractive, and that emerging markets would likely benefit from U.S.-dollar weakness. Emerging-market stocks have historically provided returns of 7% to 13% when valuations are at current levels.