How will emerging market equities perform in 2025?

Emerging markets (EM) delivered notable returns in 2024 with most regions closing the year with gains.

According to a Reuters report, the MSCI Emerging Markets Index is set to end the year 5% higher.

Singapore led the charge with a 17% annual gain, its best performance since 2017, while Kuala Lumpur stocks posted their strongest annual rise since 2010.

India stood out as a resilient performer in the EM space as it weathered both domestic and global challenges.

Indian stock markets are poised to end the year 9% higher, marking their ninth consecutive year of positive annual returns, highlighting sustained investor interest.

Despite the momentum, EM equities have lagged behind developed markets in overall returns.

As of November 30, 2024, EM equities, as represented by the MSCI EM IMI, posted a year-to-date (YTD) return of 7.38%, lagging behind the MSCI World IMI's 21.10% return.

EM equities 2025: caution driven by geopolitics

In 2025, emerging markets are likely to remain impacted by global macroeconomic and geopolitical uncertainties.

JPMorgan is cautious on EM equities, seeing modest gains owing to persistent headwinds such as elevated interest rates, a robust US dollar, and limited policy easing within emerging economies.

While Federal Reserve rate cuts have historically bolstered EM equities, the brokerage noted uncertainty around the Fed's ability to cut rates beyond current market forecasts.

Additionally, the strength of the US dollar poses a significant challenge to EM equity performance, limiting potential upside.

JPMorgan has reduced its exposure to China, pointing to ongoing risks such as trade tariffs, structural economic weaknesses, and tepid stimulus measures.

The brokerage has adopted an overweight (OW) position on India and the UAE within emerging markets, alongside Japan's banking sector and key US industries.

It has also highlighted South Africa as a favorable opportunity, recommended capitalizing on US exceptionalism with an OW on Mexico, gaining AI-driven growth exposure through Taiwan, and reinforcing USD defensiveness with a continued OW stance on the UAE.

Thematic investing to guide EM strategies

As dispersion across stocks, sectors, and countries intensifies, JPMorgan said there is a need for a thematic and opportunistic approach to EM investing in 2025.

Moving away from traditional benchmark-based strategies, the firm has recommended prioritizing themes that align with evolving market dynamics and macroeconomic conditions.

The recommended themes for 2025 include:

Financials: These are expected to benefit from better net interest margins during shallower easing cycles.

Information Technology: Continued advancements in generative and edge AI present compelling growth opportunities.

Utilities: Strong pricing power is likely to support this sector’s performance.

On the other hand, sectors such as materials, consumer discretionary, and real estate are projected to face challenges.

Slowing demand from China and Europe, combined with limited stimulus measures, dampens the outlook for these areas.

Commodities and credit markets

JPMorgan’s insights on commodities and credit markets for 2025 reflect a nuanced view of global trends:

Gold: Positioned as a long investment due to its resilience across various macroeconomic scenarios.

Oil: The brokerage recommends a short position, citing weak supply-demand fundamentals that align with US energy policies.

Credit Markets: Corporate balance sheets are expected to remain robust, supported by extensive refinancing and extended debt maturities.

JPMorgan noted that higher default rates in credit markets are unlikely barring a recessionary environment, with sector-specific excesses remaining the primary risk factor.