In his half year outlook, Chetan Sehgal, Portfolio Manager, Templeton Emerging Markets Investment Trust, considers the potential for Emerging Markets as they weather the uncertainties being created in the global market.
Emerging market (EM) equities rose in the second quarter of 2025. Geopolitical tensions were a mainstay during the quarter. Uncertainties persisted due to a lack of concrete tariff deals between the United States and most countries. The conflict between Israel and Iran escalated, this time involving the United States. For the quarter, the MSCI EM Index-NR returned 5.48%, while the MSCI World Index-NR returned 5.00%, both in net UK-sterling terms.
The emerging Asia region collectively rose during the quarter. A framework agreement covering tariff rates between China and the United States has reduced some uncertainties. Indian equities benefitted from improved macroeconomic data, namely easing inflation and better-than-expected gross domestic product growth for the January to March quarter.
The US tariff reprieve on semiconductors and the strong momentum of artificial intelligence (AI) infused the technology-reliant equity markets of South Korea and Taiwan, sending them higher amid a more optimistic outlook. South Korean equities were supported by the election of its president, who promised market reforms, providing a potential for extended equity performance.
The emerging Europe, Middle East and Africa (EMEA) region’s stocks generally advanced despite tensions in the region. Iran and Israel agreed to a ceasefire following the involvement of the US military in their conflict. The conflict’s lack of impact on oil production activities in the region reduced negative sentiment; however, volatile oil prices weighed on the Saudi Arabian equity market.
Equities in the emerging Latin America region rose overall. Brazil’s central bank continued to increase interest rates during the quarter; however, expectations of the potential peaking of interest rates drove positive investor sentiment in Brazilian equities. This positivity was also evident in Mexico, where its central bank lowered the benchmark interest rate. Its benchmark rate now hovers at its lowest level in nearly three years. The region is also broadly seen as relatively buffered from US “reciprocal” tariffs and major geopolitical conflicts.
Pivotal junction
EM equities are poised at a pivotal junction with geopolitical tensions hovering in the backdrop. However, equities globally are facing pressure from geopolitical events as well. Our bottom-up approach aims to potentially capitalise on the specific dynamics of the equity markets in which we are invested, rather than merely reacting to global uncertainties.
The notable easing of trade policy tensions in China does not completely erase the uncertainties. We believe that China is likely to continue its policy support to lift its domestic sector and bolster its equity market—the latter includes encouraging more domestic institutions to redirect their capital to equity markets. While these measures provide some encouragement to the investing backdrop in China, we prefer to focus our Chinese exposure on China’s internet platforms, which we believe should be key beneficiaries of the consumption recovery in China. In India, inflation is showing signs of moderating, and the central bank has reduced its benchmark interest rate several times this year. Lower interest rates could be a catalyst for improved sentiment, in our view, especially in the realm of corporate investment and consumer spending. We believe the resulting improvements in liquidity and profit margins are supportive for Indian equities. In all, we believe that policy easing would help bolster the country’s economic growth, providing some buffer against any slowdown in global growth or political uncertainties outside of India.
The focus of the South Korean equity market has shifted to the new president’s policies, which aim to bolster the country’s economic growth. Companies in both South Korea and Taiwan are among the most sensitive to trade uncertainties; while many have already made strides to mitigate such risks, any form of policy support could provide additional levers for earnings growth.
The outlook for Brazilian equity seems to be on the mend as well. The benchmark interest rate appears to be nearing its peak, and while it may remain at current levels for a while, the presidential election in 2026 may provide the central bank with a catalyst to reduce its benchmark rate.
As experienced portfolio managers, we have seen many headwinds across EM regions. These have included COVID, geopolitical tensions and issues plaguing China’s real estate sector. However, we believe that EM countries have learned from past lessons and are likely to come out stronger from this current uncertainty. There have been success stories, and in our view, the direction of changes in EM companies is positive.
