The positive feedback loop we’re expecting to see in emerging market economies

Emerging markets seem to be entering an extended period of rate-cutting, which should support their economies and equity markets. Pendal EM portfolio manager JAMES SYME explains

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Uncertainty remains high in financial markets among participants and policy makers.

This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today’s tariff-driven environment is more challenging than the COVID era.

“[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly,” IMF deputy Gita Gopinath said last week.

“But this time around the shock has differential effects.”

Looking at previous cycles in emerging markets – especially considering the impact of a weaker US dollar and incoming capital flows – Pendal’s EM team believes emerging markets are mostly in an extended period of cutting policy interest rates.

We believe this will be supportive of emerging economies and emerging equity markets.

Emerging markets cutting rates

Last year we saw rate cuts in many advanced economies as the 2022 inflation surge eased.

But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts.

Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.

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In the emerging world, however, most central banks have continued cutting rates.

The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025.

(Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.)

A clear pattern

There is a clear pattern here.

GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America.

Many of the central banks on hold are in emerging Asia – China, Taiwan, Malaysia – despite this region’s more-challenging growth outlook.

We believe this is because those countries – with their export-based economic development models and big current account surpluses – have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries.

For example, Taiwan had a 2024 current account surplus of 14.1% of GDP.

Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%.

By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP.

Its CPI inflation averaged 3.1% in the first four months of 2025 – but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year.

What it means for investors

In terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets.

We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts.

This, we believe, is the principal trigger of a positive feedback loop we’ve seen in emerging economies in previous up-cycles.

We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels.

We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
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