Mid-2025 Review: Opportunities and Risks in Emerging Market Portfolios

See How to Reassess Your Investments for the Second Half of the Year

We’ve reached the halfway mark of 2025, and global investors are evaluating portfolio performance in emerging markets and balancing recent gains.

In the U.S., an uncertain economic environment—marked by tariffs, inflation, and public debt—makes it even more relevant to review exposure to these markets.

Global Economic Context and the Role of Emerging Markets

Recent trade conflicts have dominated market analysis, especially with the new U.S. tariffs on the European Union, Mexico, Canada, and Asia.

The depreciation of the dollar is also fueling capital flows into emerging markets.

The MSCI Emerging Markets Index rose 8.6% year-to-date through May, outperforming the MSCI World (4.9%) and the S&P 500 (1.1%).

Despite new trends, factors such as inflation and rising tariffs increase uncertainty.

Triodos, for instance, projects GDP growth of around 3.7% for emerging markets in 2025—a decline compared to the last decade’s average but still more than double the growth in developed countries.

Growth Opportunities

The energy transition sector stands out, particularly in renewable energy and green infrastructure at various stages of development.

In addition, it may be worth investing in technology and financial products and services.

In emerging regions, these sectors benefit from global trends such as urbanization, technological advancement, and the replacement of commodities.

With high local yields, sovereign and corporate bonds offer attractive real returns—especially when combined with currency hedging.

Risks to Monitor

• Currency and political volatility in the U.S.
• New tariff cycles or changes in monetary policy—already highlighted as elevated risks by Bernstein and Capital Group—add to the uncertainty.
• Regulation and limited liquidity
  Investments in emerging markets carry risks such as volatility, regulatory restrictions from local governments, and often lower liquidity.

Strategies to Seize Opportunities and Mitigate Risk

Active and selective diversification

The wide dispersion in emerging market returns makes active management even more essential. Focusing on markets like Greece, Brazil, India, and China can yield better risk-return profiles.

Sector rotation and time horizon

With global inflation and high interest rates, it may be strategic to balance between equities, short-term fixed income (bonds), and sectors that offer more stable yields (like utilities and energy).

Currency risk management

Hedging currency exposure in local bonds is crucial, as a sudden reversal in the dollar could impact returns.

PIMCO highlights resilience in emerging markets, but that depends on effective risk management in investments.

Corporate credit due diligence

GEMs consortium data show that emerging firms have a default rate similar to “high yield” companies in developed markets (~3.6% annually).

This means the risk is real and must be considered—but it can also be manageable through stronger quality control.

Mid-Year Outlook

Consulting firms highlight an uncertain landscape but with clear opportunities:

• According to Bernstein, despite volatility, there are good opportunities in small-cap banks and private credit.
• Morgan Stanley maintains a favorable position on fixed income and equities, even amid risks in the Americas.

Thus, a well-structured portfolio can capture global growth while protecting the investor from external shocks.

Typical Allocation and Recommendations

Experts recommend allocating 10–20% to emerging markets to balance dynamism with stability. This range takes advantage of higher growth potential without excessive exposure to risk.

Outlook for the Second Half

• Trade tensions easing: A de-escalation of U.S.–China tariffs could boost export- and commodity-driven emerging markets.
• The Fed and global interest rates: Inflationary pressures may delay Fed rate cuts, keeping the dollar strong. However, global inflation control favors emerging economies.
• Geopolitical and ESG factors: The evolution of sustainable investing in emerging markets is gaining attention, though regulatory changes should be closely monitored.

Economic Conclusion

By mid-2025, well-designed portfolios are managing to extract value from emerging markets by combining

Strategy	Potential Benefit
Active management	Capturing regional opportunities
Sector diversification	Risk reduction and balanced returns
Currency hedging	Protection against global volatility
EM credit selection	Controlled risk and attractive returns

As Invesco’s analysis explains, sovereign wealth funds are betting on EM and China to navigate volatility—clear evidence that the strategy is gaining traction.

Written by

Gabriel Gonçalves