Emerging Markets Potential

Investing.com – Emerging markets have faced challenges for some time, but prospects may improve due to the US election and a decrease in US economic growth, according to UBS.

A three-year phase of US economic dominance, with an average nominal GDP growth of 8.3%, compared to 5.6% in China, is predicted to end as nominal growth falls below 4% next year.

This sets a lower threshold for emerging markets (EM). Although EM growth is expected to slow, EM growth excluding China is projected to rise to the ~90th percentile of its post-global financial crisis distribution in terms of growth differentials against the US.

"Every little helps for an under-positioned asset class: net portfolio flows into EM are experiencing their longest dry spell in 20 years," analysts at UBS noted in their report dated October 15.

Regarding the upcoming US presidential election, UBS considers a divided government scenario—aside from a low probability of a Blue Sweep—without additional tariffs to be the most favorable for EM by 2025.

Reduced fears of tariffs, poor US fiscal outlook, and declining growth create an environment conducive to potential capital flow into EM. UBS anticipates the MSCI EM index to reach 1255 by the end of 2025, reflecting approximately 10% total returns.

However, UBS warns of four significant obstacles to robust EM returns: slower global trade, with China's housing construction expected to remain weak until 2026; low EM risk premiums; stabilization of US corporate bond yield declines as the Federal Reserve lowers rates to 3.25%; and the risk of higher tariffs from China.