Thanks to Tariff Confusion and Global Volatility, Investors are Shifting to Emerging Markets

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The current volatility in the global market is driving investors into reassessing their risk and reward systems. As developed economies struggle with policy uncertainty, high valuations, and weak returns, investor appetite is shifting. This recalibrated thinking has led to emerging markets being brought back to the limelight. Capital is moving toward countries with stronger macro fundamentals, undervalued assets, and room to grow. For investors, the current financing mood isn’t just another rebound play but a structural realignment.

Recent May data showed that both housing and manufacturing output in developed economies missed forecasts. At the same time, tariff policy and interest rate ambiguity continue to unsettle markets. In contrast, emerging markets are gaining investor interest. Flows into local debt, equity funds, and ESG-linked securities have picked up, reflecting a broader shift in allocation strategies.

Why Emerging Markets Are Gaining

The weakening U.S. dollar is making foreign assets more attractive by contrast. Bond funds focused on emerging market local currency debt recorded eight straight weeks of inflows. The week ending June 13 alone saw $3.8 billion enter the space. JPMorgan’s GBI-EM index reports over 10% in returns this year from local currency bonds. This performance compares favorably to the 4% returns from hard-currency alternatives.

Equity performance is also diverging. The iShares MSCI Emerging Markets ETF is up 11.6% this year. That is more than twice the return of developed market counterparts like the iShares MSCI World ETF. Investors are being drawn to favorable valuations and low positioning. Many fund managers had underweighted emerging markets for years, and portfolios now have room to expand in that direction. Central banks in countries such as India, the Philippines, and Indonesia were quicker to act on inflation. Those policy moves have helped insulate these markets from current shocks, with demographics and fiscal discipline as additional tailwinds.

Where the Opportunities Are

This year, India remains a top target among emerging markets. The country continues to post strong GDP growth, with broad reforms and infrastructure investment fueling domestic demand. Meanwhile, Vietnam is seeing a rise in capital investment and export activity. Indonesia has also turned into a reliable fixed-income pick, benefiting from improved reserves and a supportive interest rate environment.

In Latin America, Brazil and Mexico are gaining traction among the developing nations. Equity valuations remain compelling, and fiscal conditions have stabilized. Mexico’s role in nearshoring trends and regional trade also gives it strategic value.

For Central Asia, Uzbekistan is drawing high investor attention. The country is seeing sovereign debt inflows on the back of strong gold reserves, fiscal reforms, and a series of credit rating upgrades. Investment banks including JP Morgan and Bank of America are recommending exposure to Uzbek external debt.

In addition, environmental, social, and governance (ESG)–focused products are contributing to renewed engagement. Asia’s green and social bond issuers are seeing strong demand, especially in India, Vietnam, and the Philippines. Institutional capital is responding positively to credible regulatory frameworks in these markets.

Investor Strategy Adjustments

State Street recently upgraded its outlook on emerging markets equities to overweight. Bank of America’s global fund manager survey shows a jump from 11% to 28% net overweight allocation to the sector. This level of exposure has not been seen since 2023.

Goldman Sachs also launched a new active ETF focused on emerging markets green and social bonds. The fund is listed on multiple international exchanges, marking an institutional vote of confidence in the region’s credit quality.

Deutsche Bank has identified the Global South as the next major focus for investors. Its top picks include India, Indonesia, Vietnam, Brazil, Mexico, and Saudi Arabia. These countries combine structural demand, favorable population trends, and improving macro data.

Risks Remain, But Outlook Has Shifted

Currency risk, geopolitical noise, and trade frictions still exist. However, investors are starting to recalibrate how they evaluate these factors. Many of the traditional concerns about emerging markets are now more applicable to developed economies. Fiscal instability, crowded trades, and sluggish growth are increasingly visible in places once viewed as safe havens.

The result is a global reweighting. The capital flowing into emerging markets may still be small relative to developed benchmarks, but the impact is large. These markets have less saturation and more room to absorb new investment. They are being judged less against old models and more on current fundamentals.

Which emerging market region do you believe offers the strongest investment case this year? Tell us what you think.

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