Crédit Agricole CIB Emerging Markets 2025 Outlook – Navigating Headwinds

The Emerging Markets 2025 Outlook by Crédit Agricole CIB emphasizes resilience amidst external pressures, including geopolitical shifts, monetary policy divergence, and global trade realignment. The report forecasts a tempered slowdown in EM growth while highlighting opportunities in selective asset classes and regions.

Key Macro Themes

1. Growth Dynamics

• Overall EM Growth:
  • Projected to slow modestly from 4.1% in 2024 to 3.8% in 2025.
  • EM-DM growth differential remains positive but narrows slightly from 2.6 percentage points (2024) to 2.3 points (2025).
  • Domestic demand continues to support growth, though external headwinds, including U.S. tariffs, could intensify.
• China:
  • Growth slows to 4.2%, driven by a decline in exports and cautious recovery in domestic demand amid property sector challenges.
  • Aggressive U.S. tariffs are anticipated to reduce GDP growth by 0.4 percentage points in 2025.
• Other EM Regions:
  • Asia: Moderated growth due to weaker electronics demand and increasing trade protectionism.
  • Latin America: Resilience in Brazil and commodity exporters but vulnerabilities in Mexico and Colombia due to U.S. policy risks.
  • EMEA: Geopolitical uncertainty and rising inflation risks weigh on Central and Eastern Europe.

2. Monetary Policy

• Easing Bias:
  • EM central banks expected to cautiously lower rates amid progress in disinflation, but risks of renewed inflation persist in parts of Latin America and EMEA.
  • Asia maintains a dovish tilt, with less urgency for rate cuts due to lower inflation concerns.
• Fed Influence:
  • U.S. monetary policy pivots will dictate the pace and extent of EM rate cuts, with a focus on preserving interest rate differentials to stabilize currencies.

3. Geopolitical Risks

• US-China Tensions:
  • Escalation in tariffs and restrictions on technology and critical minerals could destabilize EM supply chains.
  • China’s economic buffer includes stimulus measures, but sustained pressures may weaken investor sentiment.
• Tariff Impacts:
  • U.S. protectionist policies expected to negatively impact trade-dependent EMs, particularly in Asia and Mexico.
• Global South vs. West:
  • The widening divide amplifies political risks and challenges global collaboration on trade and climate issues.

Market Views and Investment Opportunities

1. Currencies (EM FX)

• Performance Expectations:
  • EM FX to face pressure in H1 2025 due to stronger USD and tariff-induced risks but could stabilize in H2 as U.S. rates decline.
  • Top Picks:
    • Asia: Favor high-yielders (INR, IDR, PHP) over open economies (KRW, SGD, MYR).
    • EMEA: ZAR benefits from reforms; TRY shows resilience in H1.
    • LatAm: BRL remains resilient, but bearish on MXN and COP.

2. Fixed Income

• Carry Opportunities:
  • EM-DM interest rate differential supports high-yield debt.
  • Short-duration instruments in Asia and EMEA remain attractive.
• Regional Preferences:
  • Asia: Receive CNY repo rates and long 5Y CGBs as China’s easing accelerates.
  • Latin America: Focus on local currency debt in Brazil and Peru.
  • EMEA: Selective exposure to South African and Turkish bonds.

3. Equities

• Regional Insights:
  • Asia: Weaker growth momentum in North Asia; India and Indonesia lead on domestic resilience.
  • LatAm: Brazil favored for structural reforms and commodity exposure.
  • EMEA: Cautious on CE4 equities due to geopolitical risks but opportunities in South Africa.

4. Commodities

• Oil and Metals:
  • Softer oil prices benefit commodity importers in Asia, while metal exporters in LatAm stand to gain from China’s stimulus measures.
• Gold:
  • Retains appeal as a hedge against inflation and geopolitical instability.

Strategic Recommendations

1. Geographic Diversification:
   • Prioritize resilient economies like India, Indonesia, and Brazil.
   • Reduce exposure to trade-sensitive markets like Mexico and Korea.
2. Focus on High-Yielders:
   • Leverage carry opportunities in Asia (INR, IDR) and LatAm (BRL).
3. Hedge Against Geopolitical Risks:
   • Use gold and U.S. Treasuries as stabilizers within portfolios.
4. Sectoral Allocation:
   • Emphasize structural themes like sustainability and regional infrastructure development.

Conclusion

The Emerging Markets 2025 Outlook highlights a year of cautious optimism. While headwinds from tariffs, geopolitical tensions, and inflation risks persist, selective opportunities exist across high-yield currencies, local debt, and resilient equity markets. Strategic diversification and active management remain crucial to navigate this evolving landscape.