The global macro environment will likely favour further dollar strength, despite the strong appreciation since the US elections in early November. Under President Trump’s second administration, we may even test the dollar highs seen during Paul Volcker’s Federal Reserve chairmanship in the 1980s.
This year should be exciting, to say the least. With a new administration in the US, news on potential tariffs seems to have appeared daily since the November election. In our 2025 EMD Markets Outlook, New Year, New Dynamics, we try to organize some of these elusive trends for you.
We expect further dollar strength this year, perhaps surprisingly so. Keep your eyes open to the ‘stickiness’ of US inflation, which could slow the expected decline in US rates. Commodities prices, too, could generate market surprises, particularly as China, where we remain cautious, accounts for a large share of global demand.
The scenarios presented are an estimate of performance based on evidence from the past on how the value of this investment varies, and/or past and current market conditions and are not an exact indicator. This example is for illustrative and educational purposes only, it is hypothetical in nature, does not reflect actual investment results and is not a guarantee of future results. It is provided as an example only and is not representative of any specific investment or strategy. There is no guarantee that any investment strategy will be successful.
Source: Candriam
As if these would not be enough surprises to keep investors busy, many nations are in need of a dose of fiscal prudence, difficult for governments whose economies are slowing. Overall, we expect enough emerging market (EM) countries will be able control their deficits that we look for lower overall financing needs and supply in 2025 relative to 2024. But fiscal prudence in aggregate will not be true for all. We think the risks of fiscal indiscipline in both some EM nations and some developed (DM) nations – including the US – may be underappreciated by markets.
Our Game Plan for 2025? Avoid the Budget-Busters: We prefer countries where fiscal discipline is the order of the day.
[1] The JP Morgan EM Bond Index Global Diversified (EMBIG) index of hard currency sovereigns rose 6.54% in 2024.
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