Laurence Bensafi, Deputy Head of EM Equities, RBC Global Asset Management (UK) Limited discusses what’s driven the outperformance of the asset class in the year-to-date and considers whether this trend has further to run.

Key takeaways

• Emerging market equities are the top performers so far in 2025, boosted by a weaker U.S. dollar and investors looking for alternative growth areas to the U.S.
• China, India, and Saudi Arabia are challenging the ‘superpower’ status of the U.S.
• EM stocks are trading near a historical discount to DM equities, despite their superior
  growth prospects.

Emerging market (EM) stocks have lagged their developed market (DM) counterparts since 2011, reversing their outperformance over the first decade of this century. The dollar’s strength over this period was a headwind for EM equities, while slowing EM earnings growth relative to many DM countries, particularly U.S. tech stocks, was also a factor. However, 2025 has seen a turnaround, with the MSCI EM Index outperforming other regional equity indices over the first
six months of the year.

Trump was the turning point

It is perhaps surprising to look back at late 2024 forecasts and see that Donald Trump’s presidential re-election was anticipated to prolong the period of U.S. exceptionalism. His business-friendly agenda was expected to be positive for the U.S. economy and company earnings. Instead, his presidency has highlighted some of the weakness in the U.S. economy.

President Trump’s proposed reciprocal tariffs and the subsequent trade negotiations have shown that the U.S.’s bargaining position may not be as strong as he had hoped. The world has changed and other superpowers, such as China, India and Saudi Arabia, are rising to the fore. China, in particular, held its nerve during a series of tit-for-tat tariff hikes, sounding cool upon entering trade talks as it realized it could likely hurt the U.S. more than the U.S. could hurt China – especially when it comes to the supply of rare earth minerals so essential to the U.S. tech supply chain.

Another Trump-related issue has been his ‘Big, Beautiful Bill’ which is expected to add at least US$3 trillion to the U.S. budget deficit over the next decade1. Higher government borrowing means increased Treasury issuance. Historically, EM countries, such as China, have been willing buyers of U.S. Treasuries, but this is changing: these countries are increasingly aware that there are other ways of responding to higher U.S. tariffs without resorting to a trade war.

It’s all about the dollar

The dollar has been on a downward trend since U.S. interest rates peaked in October 2023, but the deceleration has picked up pace since Trump returned to the White House. Recessionary fears, the U.S. president’s repeated attacks on Federal Reserve Chairman Jay Powell’s refusal to slash interest rates, concerns over the size of the U.S. budget deficit, and policy stability have all conspired to weaken the greenback.