Investing.com – Emerging markets have been unloved for some time, but according to UBS, the US election and declining potential drivers of US economic growth could have some upside.
A three-year regime of American exceptionalism will end, with average nominal GDP growth of 8.3% compared to 5.6% in China, as nominal growth falls below 4% next year, according to UBS.
This sets a lower bar for emerging markets, the bank adds. While emerging market growth is also about to slow, growth differentials between emerging markets and the US are rising to the ~90th percentile of their post-global financial crisis distribution.
“Every little bit helps for an under-positioned asset class, with net portfolio flows into emerging markets experiencing the longest dry spell in 20 years,” UBS analysts said in an Oct. 15 note.
As for the upcoming US presidential election, UBS’s assumption of a divided government next month with no additional tariffs barring the unlikely Blue Sweep scenario is the most bullish scenario for emerging markets for 2025.
Reduced tariff fears, weak US budget prospects and slowing growth nevertheless set the stage for a potential rotation of money flows to emerging markets, according to the Swiss bank, which projects MSCI EM at 1255 by the end of 2025, representing a total return of about 10%.
All good so far, the bank added, but it also sees four barriers to strong emerging market returns: Weak(er) global trade – China’s housing construction won’t bottom until 2026, while US imports and the technological revival in Asia is slow; negligible risk premia from emerging markets; the decline in US corporate bond yields is leveling off, even as the Fed cuts to 3.25%; and risks of higher Chinese tariffs.
