"It ain't (sic) about how hard ya (sic) hit. It's about how hard you can get hit and keep moving forward. How much you can take and keep moving forward.”
This quote from on-screen boxer, Philadelphian, and philosopher Rocky Balboa encapsulates the essence of resilience and determination in the face of adversity. We believe it’s a fitting metaphor for today’s EMs, particularly in Asia, which have weathered global volatility, policy shifts, and technological disruption, and we believe are now poised to move forward with renewed strength.
As we approach the end of Round 6 in 2025, the narrative of US exceptionalism has faltered, and the global investment cycle has begun to pivot. EMs are demonstrating their ability to absorb shocks and adapt. With a weakening dollar, rising domestic investment, and a democratization of artificial intelligence (AI) innovation, the stage is set for a new chapter of growth. One that rewards those who recognize resilience as the foundation of opportunity.
The Donald and the dollar
Liberation Day rattled markets. 10% baseline tariffs, reciprocal tariffs, and sector-specific measures sent markets to the canvas. However, the Trump administration has developed a pattern of walking back from its initial extreme positions.
The relative strength of the dollar is the single most significant factor in EM performance (Chart 1).
Chart 1. US dollar index vs. MSCI EM/DM returns
We believe today’s environment, characterized by persistent US policy uncertainty, declining institutional strength, and growing fiscal largesse, is narrowing the risk premium between developed and emerging markets.
Add to this a softer dollar, and an increasingly compelling case for EM exposure becomes apparent. Not only has the dollar been declining, but EM currencies have strengthened; we expect this will help to boost consumer spending power across emerging economies.
A new leg in the investment cycle
US policy shifts have triggered a fresh wave of domestic investment cycles around the world. In Europe, defense 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 the capital. The result? Stronger local currencies, rising Treasury yields, and a weaker dollar.
But defense spending is only part of the story. We believe we are in the midst of a once-in-a-generation overhaul of infrastructure, which is necessary to support the latest round of technological breakthroughs and global electrification of the energy mix.
Historically, EM economies have thrived during periods of elevated global capital expenditure (CapEx). So far, the latest CapEx surge has yet to translate into EM outperformance, but if history repeats itself, a sharp correction could be just around the corner (Chart 2).
Chart 2. Historic correlation between CapEx and EM performance
The tech train rolls on
China’s Deepseek model has disrupted the AI narrative (Chart 3).
Chart 3. Total market cap of AI-related stocks
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 into data centers and advanced semiconductors.
Yet, lower compute requirements may accelerate AI adoption, not hinder it. Since the DeepSeek moment, CapEx announcements from the hyperscalers have continued to grow. We believe Chinese companies are undervalued and will gain a greater share of the AI market.
Why now (really) is the time
It has been almost a decade and a half since we’ve witnessed this level of conviction and confidence in the outperformance potential of emerging markets and Asia. 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 many investors will start rebalancing portfolios and trimming their US exposure. We’re barely in the foothills of this change. The long-held perception of America as a safe haven may soon be tested again, and EM and Asia are well placed to benefit from this global reset.
Final thoughts
As global dynamics shift and the pillars of US market dominance face renewed scrutiny, EMs – particularly in Asia – are demonstrating their ability to roll with the punches. These economies have absorbed external shocks, adapted to changing conditions, and are now regaining their footing in a more multipolar investment landscape. With a weakening dollar, rising domestic investment cycles, and a democratization of AI innovation, the case for EM exposure has rarely been stronger. For investors seeking diversification, growth potential, and a hedge against volatility in developed markets, now may be the time to lean into the resilience and opportunities that EMs present.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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