Emerging Market Equities: A Strategic Overweight in 2025

Emerging market (EM) equities have long been the dark horse of global investing—underperforming for years yet offering untapped potential for those willing to navigate their volatility. In 2025, structural trends and macroeconomic shifts are aligning to create a compelling case for a strategic overweight in EM assets. J.P. Morgan's latest research underscores five key drivers: a decade of underperformance creating a valuation gap, a weakening U.S. dollar, dovish Federal Reserve expectations, China's policy turnaround, and attractive fundamental metrics. For investors seeking high-growth opportunities, the time to act is now.

1. A Decade of Underperformance: The Valuation Gap

Since 2015, EM equities have lagged behind developed markets by an annualized 6% due to a combination of dollar strength, geopolitical risks, and inconsistent policy environments. The MSCI EM index currently trades at a forward P/E of 12.4x, near its 25-year average, while the S&P 500 commands a premium of 25x. This 50% discount reflects risk aversion rather than intrinsic value, creating a compelling entry point for patient investors.

China's onshore A-shares, for instance, trade at a 30% discount to their offshore H-share counterparts, a gap driven by regulatory uncertainty. Meanwhile, India's market, with a forward P/E of 15x, offers exposure to a young, growing population and structural reforms. Brazil's Bovespa index, at 10x earnings, is arguably undervalued relative to its commodity-driven growth potential.

2. Favorable USD Outlook: A Tailwind for EM Currencies

The U.S. Dollar Index (DXY) has fallen 9% year-to-date (YTD), signaling a shift in global capital flows. A weaker dollar reduces the cost of EM debt and makes local currencies more attractive to foreign investors. For EM equities, this translates to higher demand and improved liquidity.

China's yuan has stabilized after years of depreciation, supported by central bank interventions and a rebound in export demand. India's rupee, bolstered by strong current account surpluses, has outperformed its peers in the Asia-Pacific region. Brazil's real, meanwhile, benefits from a commodities boom and a more accommodative monetary policy. These currency dynamics amplify the returns of EM equities for dollar-based investors.

3. Dovish Fed Expectations: Lower Borrowing Costs for EM

The U.S. Federal Reserve's pivot to rate cuts in 2025 is expected to reduce the cost of capital for EM governments and corporations. While the Fed remains cautious, its dovish stance contrasts with the aggressive rate hikes of the past two years. This divergence creates a “carry trade” opportunity, where investors borrow in low-yielding U.S. dollars to fund higher-yielding EM assets.

China's 10-year government bond yield has dropped to 2.2%, reflecting easing inflation and a more accommodative monetary policy. India's central bank has cut rates by 150 bps since mid-2024, lowering borrowing costs for infrastructure projects. Brazil's real interest rates, now at 11%, remain high but are expected to decline as inflation moderates. These policy shifts are critical for EM equity valuations, which rely on growth expectations.

4. China's Policy Turnaround: A Catalyst for EM Recovery

China's economic stabilization efforts are gaining traction. A 17% rally in MSCI China (offshore) YTD, compared to flat onshore A-shares, highlights the market's optimism about policy reforms. Stimulus measures targeting real estate, tech innovation, and small businesses are beginning to show results, with GDP growth rebounding to 4.7% in Q2 2025.

The government's focus on “soft tech” (AI, software, and services) has outperformed “hard tech” (semiconductors and hardware), driven by firms like DeepSeek. For investors, this signals a shift toward innovation-driven growth, which could lift broader EM markets.

5. Attractive Valuations: A Structural Advantage

EM equities are not just cheap—they're fundamentally undervalued relative to their growth potential. MSCI EM earnings are projected to grow at 17% in 2025, outpacing developed markets. This is driven by structural trends in India's services sector, Brazil's agribusiness, and China's tech-driven productivity.

India's consumer discretionary and financials sectors trade at 12x and 9x, respectively, despite earnings growth of 15-20%. Brazil's mining and energy companies, with a P/E of 8x, offer yields of 6-8%, supported by a commodities supercycle. These metrics suggest that EM equities are priced for pessimism, not optimism.

Key Beneficiaries: China, India, and Brazil

• China: A policy-driven rebound in tech and real estate, coupled with a weaker yuan, is positioning the market for a cyclical upturn. Focus on AI infrastructure and domestic consumption.
• India: Demographics, structural reforms, and a $500 billion fiscal stimulus package are driving long-term growth. Sectors like IT services, renewable energy, and consumer goods are prime targets.
• Brazil: A commodities boom and currency tailwinds are supporting equity valuations. Look to agribusiness, energy, and infrastructure plays.

Investment Advice: Strategic Overweight with Discipline

For investors, a strategic overweight in EM equities requires a selective approach. Allocate 15-20% of a global portfolio to EM, with 50% in China, 30% in India, and 20% in Brazil. Prioritize quality stocks with strong balance sheets and exposure to structural trends. Use currency hedging where appropriate to mitigate volatility.

The risks—geopolitical tensions, policy reversals, and currency swings—remain real. But for those who can stomach the noise, EM equities offer a rare combination of undervaluation, growth, and policy support. As J.P. Morgan notes, “The best time to buy EM equities is when the world is distracted by short-term noise.” 2025 could be that time.