UK financial backers explore prospects in developing economies

UK financial backers explore prospects in developing economies

Investing in Emerging Markets: A New Era of Opportunities

In 2025, the investment landscape in emerging markets (EM) is brimming with potential, as structural economic shifts, technological innovation, and sectors tied to the energy transition take centre stage. The weaker US dollar, which enhances returns and eases debt burdens, is a significant factor driving this trend.

China and AI-driven Industrialization

China is pivoting towards "high-quality growth" and AI-driven industrialization, reshaping its role in global supply chains and creating openings in advanced manufacturing and tech-related sectors. This transformation is providing fertile ground for investment in these sectors.

AI and Digital Growth in Underpenetrated Markets

Markets such as India, Southeast Asia, and Africa are experiencing rapid AI adoption and fintech expansion. India's MSCI index, for instance, has risen 9.2% this year, supported by rate cuts and fintech growth. These markets present exciting opportunities for investors.

Commodities and Critical Minerals

Emerging markets like Indonesia (palm oil), Peru (copper), South Africa (precious metals), and Ghana (gold and cocoa) are well positioned to benefit from global demand for commodities essential to the energy transition and green technologies.

EM Debt: Attractive Yields and Broad US Dollar Weakness

EM local and hard currency bonds have yielded positive returns, benefiting from high real yields and broad US dollar weakness. This makes EM debt servicing cheaper in their local currencies, while sovereign spreads have compressed.

Nearshoring and Supply Chain Restructuring

Countries such as Indonesia and Mexico are benefiting from companies relocating supply chains closer to home for resilience amid geopolitical tensions. This trend is creating new investment opportunities.

Market-Friendly Political Shifts and Valuations

Several EM countries are moving towards more market-friendly governance, offering better investment climates. Valuations are attractive given wider-than-usual discounts to developed markets.

The Weaker US Dollar: A Boon for EM Investments

A weaker dollar improves returns on EM investments denominated in local currencies when converted back to USD. It also reduces the burden of dollar-denominated debts for EM governments and companies, lowering default risks and supporting economic stability.

The dollar’s weakening stems from US fiscal deficits, inflation pressures, and shifting capital flows, which favours EM currencies and debt markets.

Investing with Caution

Despite the promising opportunities, investors should proceed with caution when investing in emerging markets due to the higher risks involved. Emerging markets can be volatile and less liquid, which can drive their economies into crisis. However, they offer diversification and long-term growth potential, making them an attractive proposition for those who understand the risks and can take a long-term view.

A New Focus on Emerging Markets

According to Fidelity International research, nearly 15% of investors view emerging markets as good investment opportunities for the financial year. UK retail investors are considering investing in emerging markets to avoid domestic economic issues.

Popular Emerging Markets

Growing economies in Africa, Asia, Latin America, and Europe are attracting investors seeking higher returns. Certain Fidelity funds with exposure in Asia have become popular among investors. Kenya, Pakistan, Hungary, and Bangladesh have produced optimal returns for investors due to interest rate cuts and foreign interest.

Expert Opinions

Andrew Oxlade, investment director at Fidelity International, stated that selective opportunities are emerging in global markets, and emerging markets are coming back into focus. Emily Fletcher, Co-manager of the BlackRock Frontiers Investment Trust, stated that emerging markets have done well in 2025, with a weaker US dollar being beneficial by easing debt burdens and attracting foreign inflows.

Currency Movements

Sterling has strengthened against the dollar, trading at $1.35, and the euro is trading at $1.17. The US dollar has lost its global standing and power due to soft job reports and tariff fallout. A weaker dollar encourages money into non-dollar assets, including those in emerging markets.

Larger, more mature economies are facing challenges due to Trump's tariffs, geopolitical tensions, and weaker currencies. Many emerging market countries are reducing the amount needed to pay back dollar-denominated debt due to the weakening US dollar.

In conclusion, investors are finding compelling opportunities in AI, digital infrastructure, commodities critical to the energy transition, and reorganized supply chains within emerging markets. Active management and regional diversification are advised to navigate geopolitical and policy risks.

1. The transformation in China towards "high-quality growth" and AI-driven industrialization is creating openings for investment in advanced manufacturing and tech-related sectors in global supply chains.
2. Markets such as India, Southeast Asia, and Africa are rapidly adopting AI and fintech, with India's MSCI index rising 9.2% this year, supported by rate cuts and fintech growth, making these markets intriguing opportunities for investors.
3. Emerging markets like Indonesia and Mexico are gaining from companies relocating supply chains closer to home for resilience amid geopolitical tensions, which creates new investment opportunities.

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