13 October 2025
2025 has offered emerging market believers plenty of bragging rights. After surviving largely unscathed from the most aggressive Fed tightening cycles in decades, EM asset classes have delivered a stellar performance this year, helped by a big drop in the US dollar and continued policy easing in many individual EMs. But is the rally just about the favourable external environment, or could something more fundamental be driving the renewed investor interest in EMs?
The latest IMF World Economic Outlook tackles this question. The conclusion is that there is indeed more going on than just favourable global conditions. For one, improved policy frameworks have mattered a lot, especially during periods of market stress, such as the 2022 global inflation spike. This includes greater policy credibility with more independent central banks, less reliance on FX intervention, deeper local capital markets, and stronger fiscal guardrails. EMs were also more proactive and aggressive in countering inflation with a policy tightening campaign that began a year earlier than the Fed, which in turn allowed EMs to ease more liberally as the inflation threat receded.
Looking ahead, there are important questions worth asking about the EM bull story. Can EMs deliver on the widely held expectation of faster, more resilient macro growth? Could the growth in global trade fragmentation pose headwinds? And can China continue to beat deflation? Yet, the signals are promising, particularly given the prospect of a medium-term US dollar bear market amid fading US exceptionalism. And crucially, in a global market backdrop that looks to be “priced for perfection”, EMs still benefit from undemanding valuations that can help keep attracting global investor flows.
China’s “Golden Week” holiday drew to a close last week. The annual break traditionally heralds a mass getaway for millions across the country, and a spike in spending on travel and retail. It also meant a week-long hiatus for China’s stock markets. Here are some post-holiday reflections:
#1. Golden Week travel statistics are breathtaking. China’s Ministry of Transport reckons the total number of trips taken over the eight-day break reached a record high of 2.4 billion – that’s up by around 6% on last year.
#2. While stock markets were closed, this year’s re-rating has been impressive. The MSCI China index is up by around 40% in 2025. Technology has been the growth engine, and further breakthroughs, particularly in AI, could spur further gains. In other sectors, further upside depends on a continuing earnings recovery.
#3. What upcoming events could provide direction on policy? Activity data for September and Q3 GDP are due between 15-20 October and may offer clues on policies to boost consumption in the upcoming 15th Five-Year Plan. That plan will be discussed at the 4th Plenum – a key decision-making session – later in October, and a draft proposal submitted for approval at the National People’s Congress in March 2026.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 10 October 2025.
We used to be uncertain, but now we’re not so sure. US macro data have become increasingly difficult to read. Payrolls growth has slowed markedly, but the extent to which this is driven by demand, rather than supply, is uncertain. GDP growth, however, is holding up well on the back of rampant AI-related investment and spending by wealthy consumers, helped by equity market gains. To make matters worse, investors and the Fed must now contend with a much-reduced data flow, as the US government shutdown has halted the publication of official economic statistics. This is a nightmare for economists. |
Private sector data sources can help fill in some of the gaps but are far from perfect. The ADP employment figures, for example, were weak in September and have been a reasonable guide to the trend in private sector payrolls in recent years. But they can deviate meaningfully from the official numbers in any given month. For now, markets are largely carrying on regardless – perhaps a case of “no news is good news”. But over time, rising uncertainty regarding the state of the economy could create some renewed volatility.
Japanese stocks have rallied to new highs following the election of Sanae Takaichi as leader of Japan’s ruling LDP party. That reaction is partly down to her reported preference for easier fiscal and monetary policy, which could give Japanese stocks added impetus after several years of positive momentum driven by improving profits and investor-friendly corporate governance reforms. But while Takaichi’s sympathy for “Abenomics” is good news for stocks, a major shift in Japan’s policy agenda could have broader implications. The combination of a more active fiscal stance and delays to further policy normalisation by the Bank of Japan – including near-term rate hikes – could trigger fiscal worries, stoke inflation, and steepen the rates curve by weighing on longer-dated bonds. Like other regions, including Europe and the US, Japan’s 30-year bond yields have seen volatility this year. |
But while the fiscal outlook is less clear, the broad market reaction to Japan’s political developments has been positive.
As a defensive, longer-duration asset class, listed infrastructure has faced headwinds from high rates in recent years. But in the first three quarters of 2025, returns have been strong – with the Dow Jones Brookfield Global Infrastructure index up by 13%. Some listed infrastructure analysts think a mix of strong structural drivers and global policy easing – including US rate cuts – could signal the start of a multi-decade investment cycle. It’s being driven by shifting trends in demographics, energy demand, and digitalisation, which are leading governments to prioritise policy support in areas like electrification (including renewables), AI and data centres, and telecoms. Yet, for investors, infrastructure sector valuations remain potentially compelling. |
While structural drivers and lower rates are tailwinds, infrastructure also benefits from strong underlying characteristics – like resilient cashflow growth, predictable income, and below-average volatility – which make it a strong diversifier for portfolios.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 10 October 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 10 October 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. *The ongoing government shutdown in the US may delay the expected releases of official data
Risk markets rose last week ahead of the start of Q3 earnings season in the US. The US DXY dollar index strengthened, with US government bonds range-bound, supported by a favourable 10-year T-note auction, and amid an ongoing government shutdown. Longer-dated Japanese bonds weakened, steepening the yield curve on rising fiscal uncertainty following Sanae Takaichi‘s election as leader of the LDP. Political worries also weighed on French OATs. US and Euro IG and HY credit spreads narrowed. US equities rose across the board, with the S&P 500 – together with Europe’s Euro Stoxx 50 and Japan’s Nikkei 225 – reaching all-time highs. EM Asian stock markets were mixed in a holiday-shortened week. The Shanghai Composite was boosted by AI stocks. India’s Sensex index rose, whilst the Hang Seng index lost ground. The gold price broke above USD4,000 an ounce.
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