As 2024 came to a close, the US led the developed world in economic growth and equity-market returns. But the US isn’t the only growth story in town. Emerging Markets could have plenty to offer investors throughout the rest of 2025.
The US is the world’s largest economy, as well as the pick of the pack for stock-market performance. The world’s fastest-growing major economy, however, is India.
India is an emerging market – that is, it has yet to reach the standards of liquidity and access that characterise ‘developed’ markets such as the US, the UK and Europe. With their typically fast-growing economies, emerging markets offer the potential for higher returns. But they are also higher risk: with less powerful institutions, high dependency on or vulnerability to commodity prices and greater potential for political instability.
This higher degree of risk is why emerging markets are not included in the MSCI World index, which is widely used as a global equity benchmark. But emerging markets offer a powerful means of diversifying portfolios, given the different drivers to which their economies and stock markets respond.
Crumbling BRICS.
Early this century, the leading emerging markets were dubbed the ‘BRICs’ – Brazil, Russia, India and China. The term was adopted by the countries themselves, with BRIC summits starting in 2009 and the addition of a capital S for South Africa in 2010.
Today, the BRICS have crumbled somewhat. Russia is uninvestable after its invasion of Ukraine. Brazil, South Africa and China have been struggling with domestic difficulties and slowing economies. And the post-Covid slowdown in China and higher global interest rates have had a further impact on the commodity-dependent economies of Latin American countries, including Brazil. Meanwhile, fertility rates are falling across the BRICS but have collapsed in Russia and China, meaning that their populations are set to contract sharply in the coming decades.
Indian exceptionalism?
India, however, stands out as a model of economic dynamism. Its economy is forecast to have grown by 7% in 2024 and is predicted to grow by 6.5% this year – figures that are the envy of other major economies.[1] [2]
India’s stock-market returns have been similarly spectacular. A muted end to 2024 took the shine off a still-respectable full-year return, but the Indian market has far outstripped its emerging-market peers in recent years. India is also differentiated from most other emerging markets in that its service heavy economy is less exposed to volatility in commodity prices.
But this success has left the Indian market looking fully valued. It currently trades at around twice the valuation of emerging markets as a whole.[3] Here, though, a comparison with the US can be instructive. Both India and the US have performed very well in recent years, and both trade on lofty valuations. Both economies are going great guns. But investors are prepared to buy US stocks on high valuations because they think there’s more to come. Should we be looking at India in the same light? It’s an intriguing question and one that we’ll be considering in the months ahead.
An eye for opportunities.
There are, however, clouds on the horizon for emerging markets overall. Last year’s big development was the re-election of Donald Trump as the US president. That represents a threat to emerging markets in several different ways. The first is the most obvious: Trump’s tariffs. High duties on imports could well have a severe impact on many emerging markets – with China’s electric vehicles the most prominent example.
Beyond that, there’s the strength of the US dollar. A strong dollar makes life difficult for emerging markets because many of the commodities they produce are denominated internationally in the US currency. So when the dollar strengthens – as it has done since Trump’s victory – emerging markets tend to lose out. With Trump having pressed ahead with widespread tariffs – particularly on Chinese imports – goods will become more expensive for American consumers, boosting inflation in the process.
Higher US inflation would prompt the Federal Reserve to keep interest rates higher for longer, which means an even stronger dollar (because US bank deposits become more attractive as a place to park your cash).
But we shouldn’t let the challenges that emerging markets face obscure their potential to offer exceptional stock-level opportunities. There are plenty of companies in China, Brazil and other emerging markets that offer a remarkable level of innovation, dynamism and potential for diversification.
In our True Potential Portfolios, emerging markets make up a relatively small proportion. And India is an even smaller part of that. But we never stop assessing our options, and we always keep an open mind. India’s vibrant economy and differentiation from its emerging market peers are a key consideration. India is also less exposed to risks emanating from the US than other emerging markets – something to be set against its elevated valuations. So it’s a market to which we’ll be paying close attention as 2025 unfolds.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. This material is not a personal recommendation or financial advice and the investments referred to may not be suitable for all investors. Forecasts are not a reliable indicator of future results.
True Potential Wealth Management is authorised and regulated by the Financial Conduct Authority. FRN 529810. Registered in England and Wales as a Limited Liability Partnership No. OC356611.
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True Potential Investments LLP is authorised and regulated by the Financial Conduct Authority. FRN 527444. Registered in England and Wales as a Limited Liability Partnership No. OC356027.
Sources:
1 India and the IMF, December 2024.
2 World Economic Outlook, October 2024: Policy Pivot, Rising Threats, December 2024.
3 MSCI India Index, December 2024.
