Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Ben Powell – Chief Investment Strategist for the Middle East and APAC and Axel Christensen – Chief Investment Strategist for Latin America, all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Three drivers emerge : We see a weaker U.S. dollar, a steady macro backdrop and mega forces as core drivers of EMs this year – yet selectivity across countries and sectors is key.
Market backdrop : U.S. stocks ended the week flat and U.S. Treasury yields slid after Friday’s jobs report showed further slowing, undershooting consensus expectations again.
Week ahead : This week’s U.S. CPI is the last key data before the next Fed meeting. We look for the impact of tariffs on goods prices and weaker jobs growth on services prices.
Emerging market (EM) assets have performed well this year. We see three drivers creating opportunities, but selectivity across countries and sectors remains key. First: a weaker U.S. dollar. Second: a broadly stable macro backdrop, with rate cuts and strong growth in some countries. Third: mega forces like artificial intelligence and geopolitical fragmentation driving dispersion. We stay neutral broad EM equities, seeking bright spots, and prefer local-currency to hard-currency EM debt.
Emerging markets have had a stellar year so far. In fixed income, global emerging debt has returned nearly 9%, versus the 4.5% of U.S. Treasuries. In equities, the MSCI EM Index is up 20%, well above the 14% rise in the developed market index MSCI World. See the red and green lines on the chart. Yet that masks considerable dispersion: MSCI China is up 29%, Poland over 50% and South Korea over 40%, according to LSEG data. In China, tariff de-escalation and government efforts to revive consumption and investor confidence have boosted near-term sentiment. Elsewhere, country drivers often tie back to longer-term forces: Korea has gained from cheap valuations and its role in the AI and chip supply chain; Vietnam from its position in rewired supply chains; Poland from easing geopolitical risk. This shows why a granular approach is key as mega forces shape EM returns in different ways.
Dollar weakness has helped drive EM returns this year. Many EM currencies are up against a dollar that has fallen about 10% this year against major currencies, LSEG data show. Weaker dollar periods have typically coincided with stronger relative EM performance, including equities, as repayment of dollar-denominated debt becomes cheaper, supporting earnings. It also amplifies EM returns for dollar-based investors by boosting the value of local-currency gains when converted back to dollars.
An improved macro backdrop
Another driver for EMs is an improved macro backdrop. The IMF projects the EM-DM growth gap narrowing in 2025 from the 2010-2019 average – but that masks structural changes in several countries that we think bode well for durable growth. For example, India and Vietnam are making strides developing their services and manufacturing industries, respectively; Mexico and Brazil are exhibiting monetary discipline; and Chile’s strong financial institutions add stability. Inflation is already back below pre-pandemic levels in several EMs and rate cuts are well underway. Mexico, for example, has cut five times this year, Indonesia four times and Poland three. Pending Federal Reserve rate cuts – though likely modest in our view – would give EM central banks more room to ease, as following the Fed reduces the risk of local currency depreciation. We see opportunities to lock in yields in local-currency bonds in Hungary, the Czech Republic, South Africa, Brazil, Mexico and Colombia.
The third driver is mega forces. As we’ve long said, mega forces – not macro factors – are the new drivers of returns, and their impact is uneven across EMs. That’s why we seek out bright spots, while staying neutral broad emerging equities in the near term. The rewiring of supply chains is benefiting countries like Mexico, Brazil and Vietnam, in our view. Taiwan and South Korea are major players in developing the semiconductors needed for the AI buildout, and China is advancing its own AI technology. South American countries like Chile and Peru are benefitting from demand for critical materials needed for the low-carbon transition. On a longer-term horizon, we think India can leverage its younger population and growing digitization to scale into a cutting-edge digital economy. India’s promise is one reason we hold a long-term, strategic overweight to EMs.
Our bottom line
Dollar weakness, resilient economies and mega forces are shaping EM performance. Dispersion reinforces our selective stance. We stay neutral on broad EM equities, seeking bright spots, and prefer local-currency EM debt.
Market backdrop
The S&P 500 hit another all-time high on Friday before ending the week little changed. Government bonds globally began the week under pressure, with the 30-year Treasury yield briefly topping 5.00%. The U.S. two-year Treasury yield then fell to 3.51% and the 30-year to 4.76% after the August jobs report showed job growth slowing sharply. Yet layoffs have not greatly increased and wage growth is still too high for inflation to hit the Fed’s 2% target. We expect a quarter-point cut next week.
This week, U.S. CPI data may shed more light on the impact of tariffs. Tariffs are already pushing up prices in appliances and furniture. But last week’s weak U.S. jobs report and slowing wage growth means the Fed is highly likely to cut rates next week. In Europe, we expect the European Central Bank (ECB) to leave interest rates unchanged as policymakers wait to see the impact of U.S. tariffs on euro area activity.
Week Ahead
Sep. 7 : Japan trade balance; China trade balance
Sep. 9 : China CPI
Sep. 11 : U.S. CPI, ECB policy rate decision
Sep. 10-17 : China total social financing
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