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Investing.com -- Analysts at Capital Economics highlighted in a note Thursday that after a strong performance in the first half of the year, the rally in emerging market assets has slowed.
The firm noted the slowdown in the past few weeks, following U.S. President Trump’s new tariff announcements.
“The latest flurry of US Executive Orders has left tariff rates generally higher than anticipated, and particularly so for several Asian countries, as well as Brazil and South Africa,” said the analysts.
They added that as a result, EM currencies have broadly depreciated versus the U.S. dollar in the past weeks, while an average of EM equities has halted its steady performance against developed markets.
However, Capital Economics also noted that the market reaction to the tariff news has been “fairly limited,” reflecting released over the increased clarity or hopes that current tariffs will be lowered through further deals.
While the firm expects a potential trade slowdown, as the trade war continues to play out, it believes the bigger picture is that “market participants seem fairly upbeat about EM markets.”
However, it noted that there are also other headwinds in play, such as Fed policy not being eased as much as anticipated and the downbeat forecasts for commodity prices.
“All of this informs our view that the positive narrative surrounding EM assets will fade,” stated Capital Economics. “Indeed, we don’t see much scope for the outperformance of EM assets to resume, although we still expect them to eke out further gains.”
Despite the cautious view, the firm said that at a country level, it sees some pockets of optimism, with the enthusiasm around AI set to continue and support equities in Asia, primarily in Taiwan and China.
For bonds, the firm expects “sizeable returns” from local currency bonds in Turkey, Brazil and South Africa.