Emerging Markets in 2025: Rebalancing and resilience in a new global reality

As the world continues to adjust to increased geopolitical tension, economic shifts and quickly changing trade policy, HSBC’s Emerging Markets Seminar 2025 provided a variety of insights into this complicated picture.

Tariffs, debt and the Central Bank balancing act

Janet Henry, HSBC’s Global Chief Economist, began by explaining how the US global economic outlook is increasingly influenced by tariffs, debt, fiscal dynamics, and central bank caution. The U.S. is using tariffs as tools for negotiation, revenue generation and positioning itself geopolitically, particularly against China. This has made the global investment landscape harder to second-guess.

Meanwhile, Western economies, including the U.S., are dealing with high levels of debt. Markets are reacting to this through raising term premiums, which increases the cost of capital for the private sector and creates uncertainty about future growth and inflation prospects. Central banks, facing sometimes conflicting or incomplete labour market data, and, in the U.S., the risk of higher inflation as higher tariffs feed through, are understandably being cautious. The Fed looks likely to cut rates in 2025-26, but not by as much as markets currently expect. Meanwhile, the ECB seems set to keep its deposit rate steady at 2%, choosing to avoid further monetary stimulus.

Emerging Markets Rebound: Debt, Equities, and a Weaker Dollar

Dr. Murat Ulgen, HSBC’s Global Head of Emerging Markets Research, was optimistic. After years of fluctuation, emerging markets have recovered some of their lost ground. Local debt markets are doing well, helped by declining inflation, more relaxed central bank policies, and a weaker U.S. dollar.

Despite geopolitical tensions and ongoing uncertainty, capital is flowing back to EMs. Equities, typically seen as vulnerable to volatility, are attracting attention again, thanks to attractive valuations and shifting capital flows. A long-anticipated shift away from U.S. assets could be gaining speed, again setting the stage for an even broader EM resurgence.

China’s deflationary pressures and trade realignment

Dr. Frederic Neumann, HSBC’s Chief Asia Economist, focused on the structural challenges facing China and its impact around the rest of Asia. China is wrestling with deflation, due to under-consumption and an oversupply in housing and manufacturing. The collapse of the property market has resulted in high inventories, while household confidence remains low, with growing concerns about retirement.

Although China’s direct exposure to U.S. tariffs is limited, there is still uncertainty about future trade restrictions. While Chinese exports remain fiercely competitive, they are creating disinflationary pressure on neighbouring economies. At the same time, labour-intensive goods in Southeast Asia remain highly competitive due to relatively low wage costs, encouraging ongoing foreign direct investment inflows into the region.

Weak dollar, strong EM story

EM currencies have been performing more strongly than in recent years, said Paul Mackel, Global Head of FX Research, HSBC. The US dollar’s weakness has presented many EM currencies, especially in Latin America, Türkiye, South Africa and parts of Asia, with an opportunity.

However, portfolio flows remain moderate, and economic fundamentals are not as strong as in past EM rallies. While recent months have been characterised by a ‘Goldilocks’ environment for EM currencies, and this should continue to be the case, there are still some less supportive signals of which it is important to be mindful.

EM equities ready to shine

According to Alastair Pinder, HSBC’s Head of EM and Global Equity Strategy, EM equities look well placed to rebound. The weaker dollar, combined with modest growth differentials and underweight positioning by global funds, presents an opportunity.

Surprisingly EM equities are now seen as less vulnerable to tariffs, as many listed companies rely on domestic revenues. Domestic investors in China and India are also driving flows, helping to offset external volatility. Meanwhile Latin America is a relative winner from trade negotiations, especially following new USMCA frameworks.

GCC: A story of reform and resilience

Simon Williams, HSBC’s Chief Economist for CEEMEA, highlighted the Gulf Cooperation Council (GCC) as a standout EM story. With low debt, strong growth, and strong reform agendas, the GCC region, especially Saudi Arabia and the UAE, offers both stability and a renewed energy.

Thanks to young populations and an openness to immigration driving demand, governments in the region have the financial capacity to invest and innovate. This helps to protect the region from geopolitical shocks, though oil price volatility is a constant concern.

The structural reforms the GCC is implementing, from business regulation to cultural liberalisation, are also making these economies more accessible to foreign capital, added Simon.

China’s stimulus challenge

Keyu Jin, Professor of Economics and author of The New China Playbook, gave a detailed view of China’s domestic policy dilemma. The overall picture looks stable, but households and private businesses are still hesitant. Unemployment is high, private investment is weak and confidence is low.

She cited how the government is cautious of reigniting debt-fuelled growth or creating moral hazards among local governments. Their focus is much more on targeted reforms and building resilience, particularly against trade and tech decoupling from the U.S.

Jin also pointed to China’s strategic investment in redundant supply chains, regional partnerships, and parallel tech ecosystems, while also considering tools like voluntary export restraints to reduce trade friction.

US trade policy – the next phase

Brad Setser, Senior Fellow at the Council on Foreign Relations, concluded the session with a range of insights about next phase of U.S. trade policy. In particular, he underscored how the use of the International Emergency Powers Act (IEPA) to impose tariffs marks a more aggressive posture by the U.S.

He noted that China surprised the market by keeping the yuan relatively anchored in the face of rising tariffs. However, its manufacturing surplus, now at 2% of global GDP is under scrutiny. Setser commented that a more effective U.S. strategy toward China would involve coalitions imposing common tariffs and tighter scrutiny of currency manipulation, but Trump remains a unilateralist and a tariff man at his core.

In other regions, Setser highlighted how the currency appreciation needed to reduce trade imbalances in many Asian countries could create financial instability as a result of their large unhedged dollar liabilities.

Setser noted that meanwhile, the U.S. faces its own challenges. The dollar remains strong, despite its recent slide, and that supports ongoing trade deficits that run against Trump's goals — and higher US rates than global rates remain a source of support for the dollar.