Emerging Markets Set to Outpace Developed Peers Amidst Favorable Inflation and Monetary Policy Easing

Emerging market assets are expected to outperform developed peers due to favorable inflation, easing local monetary policy, and more conservative fiscal policies. Analysts predict the MSCI Emerging Markets Index will gain around 15% over the next 12 months, compared to about 10% for its developed peer. Fund flows are also favoring emerging markets, with investors pouring $5.8 billion into the iShares Core MSCI Emerging Markets ETF since Trump's tariff announcement.

Emerging market assets are poised to outperform their developed peers over the next 12 months, according to a consensus among fund managers. The MSCI Emerging Markets Index is expected to gain around 15% over the period, compared to about 10% for its developed counterpart [1].

Several factors are driving this anticipated outperformance. First, favorable inflation conditions are expected to benefit emerging markets. The Citi Inflation Surprise Index for emerging markets has averaged minus 19 this year, indicating that inflation has been lower than expected [1]. In contrast, developed markets are grappling with growing debt levels and large fiscal deficits [1].

Second, easing local monetary policy is expected to boost domestic lending and consumption in emerging markets. Many emerging market central banks have been cutting interest rates, and this trend is likely to continue. The Federal Reserve's policy easing is also expected to support emerging market assets, as investors may pivot away from US investments [1].

Third, more conservative fiscal policies in emerging nations are seen as a positive factor. Emerging market policymakers are generally more disciplined and market-friendly, avoiding the unsustainable fiscal deficits seen in developed markets [1].

Fund flows are also favoring emerging markets. Since Trump's tariff announcement in April, investors have poured about $5.8 billion into the iShares Core MSCI Emerging Markets ETF, representing about 5.8% of its total fund assets [1]. This compares to $5.6 billion put into the Vanguard FTSE Developed Market ETF, which is only around 3.3% of its total holdings [1].

The MSCI Emerging Markets Index and its developed peer have both risen about 14% since April 2, with the rallies driven by optimism that Trump's tariff threats were mainly bargaining positions [1]. Bond performance has also been roughly equivalent, with a Bloomberg gauge of emerging-market debt returning 4% and a similar index of developed-market debt gaining 3% [1].

Analysts are closely watching policy decisions in various emerging markets, including Hungary, South Korea, and the Philippines, as well as economic data from India, Brazil, and other key markets [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-08-24/emerging-assets-set-to-pull-ahead-of-developed-peers-funds-say