Resilient investments: Trump addresses Congress on Capitol Hill in Washington. The end of February brought a sell-off triggered by yet another of Trump’s tariff threats and that was after benchmark indexes in developing markets had their best start in years. — AP
NEW YORK: From China’s artificial intelligence (AI) successes to Dubai’s immigrant-led boom and rising prospects of debt restructuring in Venezuela and Lebanon, the winning emerging market (EM) trades of 2025 all help investors withstand President Donald Trump’s trade agenda.
Such selective trades are protecting investors from the unpredictability of Trump’s second term because they aren’t reliant on exports to the United States, interest rate cuts or a weak US dollar.
While benchmark indexes across stocks, bonds and currencies in developing markets have had the best start in years, the end of February brought a sell-off, triggered by yet another of Trump’s tariff threats.
“Despite all this negativity, one needs to find dislocation in market prices that give opportunities,” said Jitania Kandhari, deputy chief investment officer at Morgan Stanley Investment Management.
Those ideas come in different shapes. Take the artificial intelligence (AI) rally.
Last year, investors earned some of the biggest returns in emerging markets by chasing local companies that get a boost from the AI boom in the United States.
The 81% surge in Taiwan Semiconductor Manufacturing Co (TSMC), which makes chips used in AI applications, is an example.
This year, investors are dumping TSMC and buying Alibaba Group Holding, driving a 55% gain in the shares which accounted for more than two-thirds of the MSCI Emerging Markets Index’s advance in 2025.
Alibaba’s main appeal is that it focuses on China’s domestic AI adoption, not the spillover revenue from the United States.
That makes it a hedge against Trump’s tariffs as China will continue to invest in the technology.
Plus, the DeepSeek saga has underscored the country’s strengths independent of the United States.
For equity investors, a major risk is a stronger US dollar that erodes returns earned in local currencies.
That makes countries with stable currencies more compelling, especially if they have solid reserves to back up their pegs and dynamic growth stories.
“Many Middle East nations are interesting options,” said Brendan McKenna, an EM economist and foreign exchange strategist at Wells Fargo Securities in New York.
“The United Arab Emirates (UAE), Saudi Arabia and Qatar, in particular, can act as safe havens or locations for investors to deploy capital and be isolated from Trump risk.”
The benchmark index in Dubai rose to a record high in February as an influx of expatriates boosted demand for everything from houses to cars and banking services.
Besides a currency peg, many companies also have government backing, which ensures their revenue streams.
“Because the dirham is pegged to the US dollar, investors in the UAE stock market are not exposed to forex risk,” said Carl Tohme, a fund manager at Cheyne Capital.
“This is an advantage in a highly fluid situation globally.”
Morgan Stanley focuses on economies with lower export sensitivity, a new domestic credit cycle, potential to benefit from global trade shifts and standalone reform stories.
The asset manager’s favoured targets are “companies and countries in South East-Asia benefitting from the flow of capital and trade changes, pockets of eastern Europe, some oversold markets in Latin America and some idiosyncratic frontier markets,” Kandhari said.
In Latin America, Brazil is emerging as an outperformer not only because of cheap valuations and prospects for rate hikes, but also because it is not Mexico – the country directly in the crosshairs of Trump’s trade and foreign policy assertions.
UBS Group AG is going long real versus the peso “to position for a divergence amidst real’s relative cheapness, carry and Brazil’s relatively low vulnerability to tariff risks vis-a-vis Mexico,” said Rohit Arora, EM strategist at the Swiss bank.
In Colombia, the prospect of a business and reform-friendly government coming to power next year has taken the country’s currency and stocks to the top of the EM leaderboard.
Most of Venezuela’s defaulted bonds have left the “20 US cent club”, trading above that limit for the first time in years as restructuring hopes build.
Turkey’s policy of keeping the lira appreciating in inflation-adjusted terms has made the volatile Middle Eastern currency unusually stable for global investors, allowing them to benefit from double-digit carry returns.
The country, along with Argentina, is touted as a major reform story resilient in the face of trade threats.
For many investors, including UBS, local currency bonds are becoming a favoured asset class.
Even as Trump’s tariffs may fuel US inflation and weigh on Federal Reserve easing, that won’t stop EM disinflation and rate cuts, they said.
“Selective investment in local currency debt will tend to outperform,” said Marcelo Assalin, head of EM debt at William Blair.
“The higher yielding currencies like Brazil, Mexico, South Africa and Turkey will tend to outperform this year because they are very undervalued fundamentally and they offer much higher carry to investors.”
While the plethora of seemingly resilient investments have worked well in the first two months of the year, some investors caution against extrapolating the gains to the full year.
On the last day of February, EM assets witnessed an across-the-board slump, highlighting how fragile these positions can be to a tariff escalation.
“This is a storm that no one will be completely immune to,” said Charles Diebel, head of fixed income at Mediolanum International Funds. — Bloomberg
