Emerging Markets update: May 2025
The US-China standoff remained a dominant theme in May. However, green shoots emerged as Presidents Trump and Xi agreed to a significant rollback of reciprocal tariffs. Emerging market equities saw gains over the month, albeit underperforming relative to developed market equities. South Africa and Mexico led within emerging markets while Taiwan, Hong Kong, Indonesia and Korea were notable contributors. The MSCI Emerging Markets Equity Index ended the month 4.3% higher, while the MSCI World experienced a 5.9% uptick.
Equities in the emerging Asia region rebounded following April’s volatility, supported by an improving macroeconomic backdrop in China. Chinese equities ended in the green, claiming back some of the previous month’s losses, buoyed by improving economic indicators.
In a surprising move, China reached a temporary agreement with the US, with both countries reducing reciprocal tariffs, de-escalating the punishing trade war. This bolstered growth across global equity markets, fuelling growth in the semiconductor sector which provided a tailwind for South Korea and Taiwan equity markets.
On the macroeconomic front, the People’s Bank of China introduced measures to stabilise the economy, including liquidity injections, lower market rates, and initiatives aimed at promoting high-quality development. In tandem, major state-owned banks lowered deposit rates in an attempt to stimulate consumption and lending. Despite these efforts, Chinese equities lagged emerging market peers over the month, with the MSCI China Index up by 2.7%.
Tensions between India and Pakistan briefly escalated during the month, with drone strikes and missile exchanges reported. However, the conflict was short-lived, with both countries declaring a victory within four days. The announcement, alongside progress on a UK–India trade agreement, improved investor sentiment and supported regional equity markets.
In Latin America, Brazil’s Bovespa Index reached record highs, driven by the largest foreign capital inflows into the country’s equity market in over five years. These inflows reinforced confidence in Brazil’s macroeconomic outlook and recent regulatory reforms, while also improving market liquidity and supporting currency appreciation.
The US Dollar continued to depreciate against most emerging market currencies, a move widely seen as an intentional strategy by President Trump. Overall, markets posted robust returns in May. On a year-to-date basis, emerging markets remain ahead of developed market equities with the MSCI Emerging Markets Index rising a robust 8.7% – 3.8% higher than developed market counterparts.
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