Emerging Markets Set to Beat Developed Peers by 15% in 2025

- MSCI Emerging Markets Index forecast to grow 15%, outperforming developed markets' 10% projection. - Cooling inflation, disciplined fiscal policies, and anticipated U.S. interest rate cuts drive optimism. Analysts expect emerging markets to outperform developed economies in 2025, supported by favorable monetary policies, fiscal discipline, and increasing investor interest. They forecast 15% growth for the MSCI Emerging Markets Index over the next year, which is significantly higher than the 10% forecast for its developed-market counterpart. This positive outlook is a result of improving fundamentals, attractive asset valuations, and strengthening investor sentiment. Analysts identify an expected U.S. Federal Reserve interest rate cut as a pivotal factor in this outperformance. Following remarks by Fed Chair Jerome Powell at the Jackson Hole symposium, market sentiment shifted, and traders now anticipate rate decreases. These cuts could bolster emerging market assets and currencies; in addition, a weaker U.S. dollar would boost domestic lending and consumption in developing economies, fueling further growth. Growing optimism is evident in investor flows, as the iShares Core MSCI Emerging Markets ETF has recorded $5.8 billion in inflows since April, reflecting increased confidence in equity performance. In addition, disciplined fiscal policies across key developing nations have supported positive returns for emerging market debt, since many of these economies have avoided the large fiscal deficits common in developed markets. Their inflation levels have also cooled substantially. According to the Citi Inflation Surprise Index, emerging markets averaged -19 this year, which indicates that inflation rates were lower than forecasted. Currency markets also offer specific opportunities, with analysts highlighting the Brazilian real’s high carry trade attractiveness amid improving fiscal sentiment. Although the market may have already priced in some currency trends, the overall outlook for emerging market assets remains favorable. These factors collectively bolster bullish projections for 2025.