Emerging markets are bracing for a challenging and uncertain year ahead, with economic shifts in the United States and fluctuating growth in China shaping a complex landscape for 2025, according to JPMorgan’s annual outlook. The Wall Street bank forecasts a significant slowdown in growth across developing nations, projecting a dip from 4.1% this year to 3.4% next year.

A Global Tug of War: U.S. and China’s Influence

JPMorgan’s analysts highlighted the dual pressures emerging markets face due to policy changes in the U.S. and economic unpredictability in China. “Emerging markets are caught between two giants,” the report noted, warning of “large negative supply shocks” stemming from U.S. policy shifts that could ripple across developing economies.

• United States: With Donald Trump potentially returning to the White House alongside a Republican Congress, emerging markets are likely to encounter new headwinds. These include tariff policies, geopolitical realignments, and domestic economic policies driving a stronger U.S. dollar and higher interest rates. The continuation of Federal Reserve tightening, albeit at a slower pace, adds to these challenges.
• China: China’s uneven recovery post-pandemic remains a wild card for emerging markets. The country’s ability to stimulate demand and stabilize its financial system will be crucial, as its economic slowdown has already dampened global trade and commodity prices. Emerging markets, particularly commodity exporters, are vulnerable to China’s sluggish growth.

Growth Forecasts: A Sobering Outlook

JPMorgan projects a sharper slowdown for emerging markets excluding China, with growth expected to decline from 3.4% in 2024 to 3.0% in 2025. Countries heavily reliant on exports to China or vulnerable to shifts in U.S. monetary policy are anticipated to feel the greatest impact. The report emphasizes the interconnected nature of global economies, where shifts in major markets create ripples across the developing world.

Fixed Income Challenges: Outflows and Reduced Returns

Emerging market fixed-income investments are forecasted to face significant pressures in 2025. JPMorgan predicts bond fund outflows ranging from $5 billion to $15 billion, driven by shifts in investor sentiment and higher yields in developed markets. The stronger U.S. dollar and elevated interest rates are expected to further deter investment in emerging market bonds.

Debt Issuance

JPMorgan’s projections for hard-currency sovereign debt issuance show a slight decline, with gross issuance expected to reach $169 billion in 2025, down from 2024 levels. However, rising amortizations mean net financing needs will drop dramatically to $1.3 billion, a stark contrast to this year’s $55.2 billion. These trends highlight the mounting fiscal pressures on emerging market governments.

Returns on Sovereign Debt

The bank forecasts modest returns on hard-currency sovereign debt, estimating 4.3% by the end of 2025, compared to 6.9% year-to-date in 2024. “What lies ahead for emerging markets in 2025 looks likely to be choppier waters,” JPMorgan remarked, adding that the asset class has already endured significant challenges in recent years.

Sector-Specific Insights

Sovereign Debt

JPMorgan has adjusted its market calls for specific countries:

• Dominican Republic: While the bank removed its overweight call on sovereign debt, it anticipates the country achieving investment-grade status within four years, citing ongoing structural reforms and economic resilience.
• Indonesia: The outlook for Indonesia local rates has turned bearish, with JPMorgan shifting to an underweight position. Rising inflationary pressures and tighter monetary policy are key factors influencing this adjustment.

Commodities and Trade

Emerging market economies heavily reliant on commodity exports face additional challenges in 2025. Sluggish demand from China, coupled with geopolitical uncertainties, is expected to weigh on key exports such as oil, metals, and agricultural products. Countries like Brazil, South Africa, and Nigeria could see further pressure on their trade balances.

Monetary Policy and Fiscal Strategies

Central banks across emerging markets are grappling with a delicate balancing act: combating inflation while supporting growth. The lagged impact of Federal Reserve easing may provide some relief, but the global environment remains fraught with uncertainty. Fiscal consolidation efforts in many developing countries are also under scrutiny, as governments strive to maintain investor confidence while addressing rising social and economic challenges.

Investment Opportunities and Risks

Despite the hurdles, JPMorgan’s outlook identifies pockets of opportunity for investors:

• Resilient Economies: Countries with strong domestic consumption and diversified export bases, such as India and Vietnam, are better positioned to weather external shocks.
• Green Finance: The growing focus on renewable energy and sustainable infrastructure presents investment opportunities in regions like Southeast Asia and Sub-Saharan Africa.

However, risks remain pronounced, with geopolitical tensions, currency volatility, and climate change-related disruptions posing significant threats.

A Battle-Hardened Asset Class

Emerging markets have faced a series of economic and geopolitical shocks over the past decade, from the COVID-19 pandemic to global trade wars. “2025 will be another test of resilience for these economies,” JPMorgan stated, emphasizing the importance of proactive policy measures and investor adaptability in navigating the year ahead.

Conclusion

As emerging markets prepare for a challenging 2025, the interplay between U.S. policy shifts, China’s economic trajectory, and internal fiscal dynamics will be critical in shaping outcomes. While growth is expected to moderate, targeted investments in resilient sectors and regions could offer pathways to stability and recovery. For policymakers and investors alike, vigilance and adaptability will be key to navigating the uncertainties ahead.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

27th November, 2024