Emerging market equities outperformed developed market equities by more than two percentage points in Q3 2024, marking the first consecutive quarterly outperformance for the sector since 2020, according to Lazard Asset Management.
This has attracted attention from a wider group of investors, including risk-averse types who may remain skeptical of developing economies.
Those who wish to put their money to good use in the Global South look to experts like Christopher Roy Garland, who has spent the bulk of his career consulting with a diverse array of business and government stakeholders in southern Africa and beyond. From his home base in Botswana, Garland has developed an excellent reputation for navigating the region’s tricky social, political and economic waters. He has innumerable counterparts in other dynamic emerging economies from Nigeria and Kenya to Brazil and Cambodia.
Garland and his fellow travelers believe that while now is an excellent time to invest in emerging markets, the landscape remains treacherous. These are the six trends they see shaping the investment climate in 2025 and beyond.
- Falling Interest Rates
One of the biggest reasons to be optimistic about emerging markets in 2025 is the likelihood that interest rates will continue to fall around the world. This will make capital less costly for emerging-market businesses as well as Global North developers looking to make investments in the Global South.
“While interest rates will remain higher in places like Southern Africa than in Europe or North America, any movement will help reduce financial strain on planned and under-construction projects,” Garland says.
- Growth in “Southward” Financial Flows
Factors including higher interest rates, the COVID-19 pandemic, and economic downturns in China and Europe have reduced capital flows from developed to emerging economies in recent years. However, this appears to be turning around as China once again increases spending on its “Belt and Road” global development initiative and developed economies inch toward a deal on financial support for clean energy development in poorer countries.
- Stability Challenges in Certain Regions
The biggest headwind for emerging markets may be increasing political instability. In addition to ongoing wars in eastern Europe and the Middle East, there has been a significant rise in military coup activity across Africa this decade, as well as the toppling of incumbent governments seen as pro-investment. Should the world continue on this trajectory, much recent progress is at risk.
- Renewed Focus on Corporate Governance
Political governance tends to get more attention than corporate governance, but the latter is every bit as important for outside investors in emerging markets.
“The past three decades have seen much progress in research on corporate governance and a much greater recognition of the importance of corporate governance for development,” says Melsa Ararat, lead author on a landmark 2021 paper on the subject.
In countries dominated by state-controlled enterprises or known for corruption or rent-seeking, strong private-company controls can be reassuring.
- An Uncertain Geopolitical Risk Premium
The stability challenges dogging certain regions of the developing world contribute to a broader problem for investors everywhere: that of an uncertain geopolitical risk premium. For example, Russia’s invasion of Ukraine in 2022 is a reminder that a single government’s actions can destabilize entire regions and ripple outward across the globe. A similar offensive by China against Taiwan or the United States against Iran could have even more dramatic — and even less predictable — consequences.
- Stable or Falling Commodity Prices
Global energy forecasters have sharply divergent views on the future shape of the oil demand curve. Similar disagreement reigns in other commodity markets. However, absent a major geopolitical shock, most projections presume stable or falling commodity prices through the end of the decade. Needless to say, emerging economies would benefit from such an outcome.
What’s Ahead for Emerging Economies in 2025?
The Global South is not a monolith, but emerging markets do tend to face the same challenges and incentives. We can thus make educated guesses about their collective future economic performance by forecasting how these challenges and incentives will evolve over time.
With this in mind, we have examined some of the tailwinds emerging economies have enjoyed in recent years and are likely to continue benefiting from in 2025. We have also touched upon certain headwinds that may be poised to strengthen in the years ahead.
Where does that leave us? More or less back where we began: a place where uncertainty meets cautious optimism.
Veeramachineni Lalitha
I am Finance Content Writer. I write Personal Finance, banking, investment, and insurance related content for top clients including Kotak Mahindra Bank, Edelweiss, ICICI BANK and IDFC FIRST Bank. My experience details : Linkedin