How Trump Has Made Emerging Market Assets Great Again

Rebecca Patterson is a senior fellow at the Council on Foreign Relations, a globally recognized investor, and macroeconomic researcher. 

While perhaps not the intent of President Donald Trump and his administration, their policies have fueled a powerful and surprising rally in emerging market assets this year.

At the start of 2025, investor expectations for emerging economies’ financial markets were subdued at best. After all, the administration seemed likely to implement a range of “America First” policies, including tariffs, which would weigh on these countries’ growth prospects. These markets braced themselves for these tariffs to make their respective assets less attractive, especially relative to those in the United States.

Fast forward to today: Investors in emerging markets have earned much higher returns this year than those in developed markets, despite the difficult headwinds created by U.S. trade policy. Emerging-market government bonds have gained 15 percent through September 30, while equities have risen more than 25 percent over the same period, based on benchmark indices such as the JPMorgan Emerging-Market Bond Index and the MSCI Emerging Markets equity index.

This strong emerging-market showing is largely the result of U.S. policies that have fueled a desire to diversify portfolios beyond American assets. It’s a timely reminder of how policy decisions can feed through to global financial markets, occasionally in unexpected ways.

This diversification drive began when President Trump took office and put many long-standing global policies in doubt. This accelerated with April’s “Liberation Day” reciprocal tariff announcements. Investors overseas were concerned about large exposures to U.S. assets at a time when their countries’ relationships with the United States were becoming more uncertain and less collaborative. In turn, they started selling American stocks and bonds, pulling the dollar down in the process.

The “sell everything” frenzy subsided within weeks, but the push to diversify has lingered, primarily through currency hedging. Foreign investors have been selling dollars to reduce their overall exposure to the United States, yet they continue to hold on to American equities—wary of missing out on tech breakthroughs—and U.S. bonds, which are hard to replace due to their liquidity.

The dollar has also lost some of its shine this year because of lower U.S. interest rates. Expectations for a Federal Reserve easing cycle, which became reality in September with a quarter percentage-point rate cut, reduced the greenback’s relative yield advantage compared with many peers. Two-year U.S. Treasury yields, which are more sensitive than longer-term yields to policy interest rate changes, decreased sixty-three basis points through end-September, Bloomberg data shows.

This confluence of events—a desire to diversify, lower U.S. bond yields and a weaker dollar—have fed through to emerging markets in a few important ways.

Since the U.S. dollar is by far the world’s most traded liquid currency, it tends to dictate how most other currencies behave. As former U.S. Treasury Secretary John Connolly once put it: “our dollar, your problem.” When the dollar loses value, other currencies tend to strengthen. Indeed, in the year through September 30, only a small handful of emerging currencies fared even worse than the dollar—the Indian rupee, Indonesian rupiah, Turkish lira and notably the Argentine peso (the latter bouncing off lows in recent days on hopes of a U.S. financial bailout).

As most emerging currencies have gained this year, many by double-digit percentages, local inflation pressures have often receded. That, in turn, has given respective central banks room to ease monetary policy.

Lower policy interest rates have boosted demand for emerging-market bonds. Investors seek to benefit from the rising bond prices, since lower rates push prices higher. Meanwhile, central bank easing has lifted expectations for stronger local corporate earnings, giving equities a lift. 

Importantly, both bonds and equities have benefitted from stronger local currencies, which increases returns for U.S. dollar-based investors when profits are converted back from abroad. (The stronger emerging currency buys a greater number of dollars.) Mexico provides a good example of how this has worked in 2025. While the central bank started cutting policy rates in November last year, it had room to continue easing this year to support growth, thanks in part to the stronger peso helping pull inflation lower. So far in 2025, policy rates have fallen from 10 percent to 7.5 percent.

Through September 30, Mexico’s benchmark equity index rose 27 percent. When those returns are translated from local currency to dollars, the total return jumps to more than 45 percent—a striking outperformance compared with the S&P 500’s 13.7 percent. It’s all the more notable given that it has occurred at a time when the country has faced 25 percent tariffs on exports to the United States.

China has been an even bigger surprise, given Trump’s focus on this bilateral economic relationship. While Beijing’s tariff rate has come down, it remains near 50 percent.  

Yet, the renminbi has gained 2.5 percent against the dollar so far this year, contributing to stubbornly low Chinese inflation. The central bank has eased monetary policy to support growth and fight deflation risks. Partly in response, China’s benchmark CSI 300 equity index has gained more than 17 percent through September 26, again beating out the S&P 500. When Chinese currency is swapped back to dollars, that year-to-date return rises to 20.9 percent.

A thriving local technology industry, especially in artificial intelligence, has also helped make Chinese assets attractive. Global investors want diversification beyond the United States, but want to remain exposed to these structural trends. China provides an alternative that investors like, despite tariff and geopolitical risks.

The emerging-market success stories this year, while probably not planned by the White House, may still prove helpful to Washington. Stronger macroeconomic conditions overseas reduce the risk of global financial instability spilling into and upending U.S. markets, like in the late 1990s after a financial crisis erupted in Asia. Meanwhile, buoyant local market conditions can support consumer confidence, which could result in somewhat stronger consumption, including of U.S. goods.

But for U.S. lawmakers, the lesson is clear: policy choices affect financial markets and economic conditions, and this should be ideally considered before policies are unveiled. Not every unintended outcome is as benign as this year’s emerging-market rally.

This work represents the views and opinions solely of the author. The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher, and takes no institutional positions on matters of policy.