Why now (really) is the time for emerging markets and Asia

Market consensus shattered in the first half of 2025. What began with a continuation of US exceptionalism has challenged the three pillars of systemic US capital supremacy: political and institutional stability, free trade, and the dominance of the dollar. China’s Deepseek breakthrough showed that nations beyond the US could participate in the artificial intelligence (AI) revolution.

It has been 14 years since confidence in emerging markets (EMs) and Asia has run this high. We’ve long championed the healthier micro and macro backdrop. But Trump’s policies could finally bring the broader investment community around to that view. We expect investors to begin rebalancing portfolios, reducing US exposure and rethinking what qualifies as a ‘safe haven’. We’re only getting started. The financial strength of EMs and Asia is not yet reflected in client portfolios. 

From ‘Tariff Man’ to ‘Taco Man’ to the Man who killed the dollar?

It all began with ‘Liberation Day’. Broad-based 10% tariffs, combined with sector-specific measures, initially rattled markets. However, the administration’s habit of walking back extreme positions gave rise to the so-called ‘TACO’ trade –Trump Always Chickens Out.

Now, with Elon Musk’s White House exit and no clear deficit plan in sight, the ‘Big Beautiful Bill’ is set to widen the fiscal gap. That could trigger increased hedging, capital reallocation, and higher funding costs. The rolling 12-month US fiscal deficit has hit an all-time high of $1.9 trillion.

Before Trump’s tariff announcement, consensus pointed to a stronger dollar. Instead, markets reversed sharply: equities, bonds, and the greenback fell – Trump’s ‘Liz Truss’ moment. Dollar weakness is now the dominant view, driven by domestic policy uncertainty, rising debt concerns, and stretched equity valuations. This is good news for EMs.

With so many US assets owned by overseas investors, the dollar remains the key driver of EM asset prices. Its decline could mark the end of 14 years of EM underperformance, especially in Asia and Latin America. A weaker dollar also lifts EM consumer spending power – a boon for domestic brands across Asia and EMs, where strong companies are poised to benefit from rising demand.

Source: Aberdeen, MSCI, LSEG Datastream. June 2025.

Sailing ahead

A diminished dollar could accelerate US reindustrialisation, making exports more competitive and domestic investments increasingly attractive for US firms. But rather than triggering a jobs exodus, the expansion of US industrial capacity might help leading industrial firms in EMs and Asia.

The US still lags in key areas like shipping and electrical infrastructure, where it relies heavily on EM-sourced materials and expertise. One example is our high-conviction holding in HD KSOE, a Korean shipbuilding and offshore engineering company. It stands to gain from the growing competitiveness of Korean-made ships, especially as the US imposes financial restrictions on Chinese vessels. Growing naval shipbuilding demand – driven by expanding defence budgets – adds further tailwinds for HD KSOE.

Although Trump has tempered his initial stance on tariffs, we expect a baseline level to persist. The recent Vietnam deal shows there will be differentials. Higher costs for Chinese manufacturers have translated into stronger margins and increased market share for non-China players.

A new leg in the investment cycle

US policy shifts have triggered a fresh wave of domestic investment cycles around the world. In Europe, defence budgets are rising, with similar moves underway across Asia. To fund this expenditure, major exporting nations, such as Japan, Taiwan, and Germany are selling US Treasuries and repatriating their capital. The result? Stronger local currencies, rising Treasury yields, and a weaker dollar.

Source: Aberdeen, Global Macro Research team.

But defence spending is only part of the story. We’re also in the middle of a once-in-a-generation infrastructure boom, driven by the need to support the next wave of technological breakthroughs. Historically, EM economies have thrived during periods of elevated global capex. This time will be no different. Examples include:

These shifts will drive demand for commodities, yet resource extraction has suffered from 14 years of underinvestment. We identified these trends well before ‘Liberation Day’, and we’re confident they’ll accelerate from here. Years of catch-up spending are now required.

The chart below shows that global capex and EM returns tend to correlate. So far, this surge hasn’t translated into EM outperformance – but if history rhymes, a sharp move higher could be just around the corner.

The technology train rolls on

China’s Deepseek model has disrupted the AI narrative. It delivered near-parity performance with market leaders like OpenAI, despite using less processing power and lacking access to top-tier Nvidia chips. That raised questions about the return on investment behind the Magnificent Seven’s massive capex spending on data centres and advanced semiconductors. Yet, lower compute requirements may accelerate AI adoption – not hinder it.

This shift is already creating opportunities across EMs. In China, renewed government support for national technology champions has revived investor confidence in sectors like electric vehicles, biomedicine, and green technologies.

We’re seeing investable themes emerge across the energy and data value chains, as well as in software and hardware. Notably, the energy implications are profound: faster AI adoption will require EM nations to scale up their grids more rapidly. This supports a strong project pipeline for utilities and is prompting renewed interest in nuclear as part of the broader electrification agenda.

We’re witnessing a new global capex cycle, driven by technology, green infrastructure, and growing domestic demand.

Technology as a platform

We’re particularly focused on technology hardware, especially semiconductor producers, the building blocks of the digital economy. As economies grow and modernise, we expect major investment in telecommunications and high-performance computers. We’ve been adding names that benefit from both infrastructure and application layers. These include:

We’re monitoring China’s push to build a parallel technology supply chain, which introduces national service and profit risks for Taiwanese holdings. While some technology names have already priced in a recession, we’re now seeing signs of pricing power returning, particularly in names like SK Hynix. Meanwhile, many of our dividend-growth tech holdings stand to benefit from rising demand for advanced computing power.

Infrastructure

We see strong structural opportunities in power and materials infrastructure. Governments began upgrading grids seven-to-eight years ago, but the market still underestimates the growth potential driven by AI and electrification.

In materials, copper remains a core theme. While global supply is adequate, high extraction costs and long lead times – often 12-16 years to bring new mines online – support a robust price outlook. Our preferred copper exposure is Grupo Mexico, which offers low-cost, long-life assets and strong operational leverage.

We also favour uranium through Kazatomprom, as nuclear remains the only scalable baseload alternative to coal.

In power tools, we’ve initiated a position in Techtronic, a company with a strong US moat built around its premium brand, Milwaukee. Its investment in battery efficiency and backwards compatibility creates powerful network effects. This gives customers confidence that today’s batteries will work with tomorrow’s tools.

Domestic brands/rising consumption

As emerging economies develop and modernise, rising income levels – supported by a weaker dollar – are expanding the middle class. This is driving greater aspiration and consumption, creating fertile ground for dividend-paying companies, especially leading domestic brands with strong market share. 

Final thoughts…

After years of underperformance, emerging markets are entering a new phase. Fundamentals are improving, and many economies remain relatively insulated from US domestic policy. A weaker dollar should support EM consumers and domestic brands.

Crucially, we’re on the cusp of a new capex cycle – from the energy transition to the AI revolution – with EMs well-positioned to benefit. Against this backdrop, we remain focused on companies with strong balance sheets, sustainable cashflow, and attractive valuations. Market leaders with a dominant share stand out as key beneficiaries.

These firms are poised to shape the future of EMs and Asia – turning structural shifts into sustainable returns.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.