The Resurgence of Geopolitical Risks and Its Impact on Emerging Market Equity Strategies

The world is in the grip of a geopolitical reckoning. As U.S. trade policies under the second Trump administration reshape global economic dynamics, emerging market (EM) equities find themselves at a crossroads: undervalued yet volatile, attractive yet perilous. With tariff wars escalating, inflation pressures mounting, and global growth slowing, investors are grappling with a paradox—how to navigate a landscape where risk and reward are increasingly intertwined. For contrarian investors, this environment presents an opportunity to seek undervalued assets in EM markets while hedging against escalating global tensions.

Trade Wars and the "Stagflation Tax"

At the heart of the current turmoil is the U.S. trade regime, which has hiked its effective tariff rate by over 10 percentage points since 2023. While the immediate impact on U.S. consumer prices has been muted, the long-term consequences for global supply chains and business confidence are stark. The most severe blows have struck EM exporters, particularly those reliant on Chinese or Asian supply networks. Bilateral tariff rates between the U.S. and China now exceed 100%, creating a "stagflation tax" that dampens growth while lifting inflation.

The fallout is evident in EM growth forecasts. The IMF now projects EM economies to expand at just 2.4% annualized in late 2025, down from earlier 3.5% estimates. Yet this slowdown is uneven: while Latin America and Eastern Europe face the brunt of reduced U.S. demand, regions like Southeast Asia and parts of Africa are cushioned by stronger domestic demand and alternative trade partnerships.

Valuation Disparities: A Contrarian's Playground

EM equities now trade at a 30% discount to their 10-year average relative to developed markets, even as U.S. equities—projected to hit 6,000 on the S&P 500 by year-end—soar on earnings resilience. This divergence reflects a market gripped by fear: investors are fleeing EM for perceived safety in U.S. assets, despite EM's structural advantages in sectors like technology, manufacturing, and energy.

The opportunity lies in identifying sectors and regions where fundamentals outpace sentiment. For instance:
- Technology in China and India: Despite U.S. export restrictions, these regions are accelerating domestic innovation in AI, semiconductors, and clean energy. Chinese tech stocks now trade at a 40% discount to their 2019 highs, even as R&D spending surges.
- Consumer Staples in Southeast Asia: Stable domestic demand in Indonesia, Thailand, and the Philippines has insulated these markets from external shocks.
- Natural Resources in Latin America: Brazil's agriculture and Chile's lithium reserves are critical to global supply chains, yet their stocks remain underappreciated.

Navigating the Risks: Currencies and Policy Divergence

Investors must also factor in currency dynamics. EM currencies are forecast to outperform the U.S. dollar as its "exceptionalism" fades—a shift driven by the Fed's pause on rate hikes and EM central banks' aggressive easing. The Chinese yuan (CNY), euro, and Scandinavian currencies are prime beneficiaries, while the yen and British pound lag due to fiscal strains.

Monetary policy divergences amplify this trend. EM central banks have cut rates to support growth, even as the Fed holds steady. This creates a "sweet spot" for EM bonds and equities: lower borrowing costs can stimulate domestic demand without igniting inflation, provided fiscal discipline is maintained.

The Contrarian's Checklist

1. Focus on Structural Winners: Prioritize EM firms with strong domestic demand linkages or exposure to global decarbonization trends.
2. Avoid Geopolitical Flashpoints: Steer clear of EM regions with direct exposure to U.S.-China trade disputes or Middle East conflicts.
3. Hedge with Currencies: Use long positions in CNY or Scandinavian currencies to offset EM equity volatility.
4. Monitor Inflation Metrics: Inflation in EMs is stabilizing, but watch for surprises in food prices or energy costs.

The Bottom Line

EM equities are at a critical juncture: their valuations are compelling, but their path forward hinges on geopolitical calm. For contrarians willing to stomach short-term volatility, now may be the time to build stakes in EM tech, energy, and consumer sectors. However, this is not a blanket recommendation—selectivity and hedging are paramount. As history shows, markets often bottom when fear peaks. With EM sentiment at a decade low, the ingredients for a rebound are in place, but patience—and a dash of geopolitical luck—will be required.

In the end, the resurgence of geopolitical risks has created a stark divide: between fear and opportunity, between stagnation and innovation. For those who dare to look beyond the noise, EM equities offer a chance to position for the next chapter of global growth—provided they navigate the risks with care.