Skip to main content

      More Results
        More Results
        Insights

        China-led Emerging Markets Rally Still Has Room to Run, But Faces Headwinds

        Optimism for China Tech stocks, and improved prospects for an end to the Russia-Ukraine war, have contributed to strong Emerging Market (EM) equity performance in 2025.

        5 min read
        Krzysztof Janiga, CFA
        Senior Equity ETF Strategist

        But the US-China relationship and global tariff-related uncertainties remain key headwinds for investors in the market segment. With that in mind, continuing improvement in sentiment for China Tech may further benefit EM equities. Lack of agreement between the US and Ukraine on 28 February is a major challenge delaying the peace process which may be necessary for a more sustained market rotation, in our view.

        Solid YTD Performance

        The MSCI Emerging Markets index has delivered a 4.8% year-to-date return — outperforming the MSCI World by 3.p.p (see Figure 1). Appetite for China Tech stocks and prospects of a Russia-Ukraine ceasefire supported the case for EM equity exposure. Elevated geopolitical risks have held EM back, and, until earlier this year, it had been underperforming since late 2020.

        After the US-Ukraine meeting on 28 February, the ceasefire possibility looks more distant and far less certain, likely leading to at least short-term volatility in EM equities. A sustained and broad rotation from US equities into areas which trade at lower multiples such as EM may require a progress in peace talks which could lead to a more normalised geopolitical backdrop. We believe investors need to continue monitor this element and position accordingly. 

        Figure 1: Emerging Markets Have Outperformed Year to Date

        EM equities have outperformed DM so far this year

        China Tech’s Revival

        China Tech has led the EM rally so far in 2025. The DeepSeek AI model has demonstrated how Chinese tech companies can compete with US AI giants in a more cost-effective way. And Xi Jinping’s recent public meeting with Alibaba founder Jack Ma and other domestic technology industry leaders may signal an end to the regulatory crackdown on the sector, which has been the single biggest headwind for Chinese equities — and EM as a whole — for the last four years.

        But sector sentiment is fragile, and we can’t exclude the possibility of another short-lived rally fizzling out. To compete in the AI race, however, the Chinese government needs its technology champions. This dependency provides a solid base case for a potential sustained improvement to China Tech stock returns — and therefore EM equity returns.

        Tariff Risks Remain

        Tariff-related uncertainty remains a headwind for the sector. China represents 28% of the MSCI EM Index and is the second-largest export partner to the US. South Korea and India are sixth and eighth, respectively.1 President Trump’s 20% tariffs on China may be magnified by product-related duties on steel.2 The US is also likely to seek tougher chip controls over China, with obvious risks for China Tech. India faces a reciprocal tariff risk. South Korea’s key risk is automotive sector levies.2 Mexico, the US’ largest trading partner, accounts for less than 2% of the MSCI index3; so, the impact of Mexican tariffs on the entire sector appears limited.

        Tariffs might lead to a cycle of higher US inflation and interest rates and a stronger US dollar, which would be a challenge for EM. Conversely, a Russia-Ukraine ceasefire, which remains a possibility over the medium term, might put downward pressure on global inflation, and consequently the dollar, mitigating some of the negative impacts of tariffs.

        Attractive EM Valuations

        Despite their rally at the outset of 2025, Emerging Markets still trade at low multiples compared to developed markets (Figure 2). This is the result of years of underperformance, partly driven by risk-off sentiment. This valuation divergence leaves room for an EM equity catch-up.

        The gap would narrow further and faster if sentiment around China Tech continues to improve. Sell-side analyst consensus is for low double-digit earnings EM equity growth, in line with developed market expectations.4

        Figure 2: EM Valuations Attractive Relative to Developed Markets

        P/E Multiples 12m Forward

        Figure 2 shows EM equities remain cheaper than DM equities

        EM’s Growth Potential for Long-Term Investors

        Regardless of China Tech tailwinds or geopolitics, long-term investors should consider EM equity opportunities. As we said in our analysis before the US election, EM equities offer exposure to parts of the world where growth remains robust and valuations are not stretched.

        Developing economies are an engine of growth in a low-growth world. China’s GDP is expected to expand by 4.5% in 2025, India’s by more than 6% over the next two years, and Taiwan is expected to deliver 2.8% and 2.5% economic growth over 2025 and 2026, respectively.5 South Korea is forecast to enjoy more muted growth. On balance, EM expansion is set to outpace growth in the developed world for the foreseeable future (Figure 3). This provides a base for long-term EM earnings growth.

        Figure 3: EM Forecast to Outpace the World

        Real GDP Growth Estimates

        Forecasts for EM growth outstrip DM

        How to Play Emerging Markets

        EM equities can be accessed via a number of index exposures, most commonly through the MSCI Emerging Markets Index. It’s important to note that APAC countries dominate EM equity indices, for example, representing more than 80% of the MSCI Emerging Markets Index. Africa, Saudi Arabia, and Mexico complement APAC exposure with a commodity cushion.6

        SPYM GY

        SPYM GY

        SPDR® MSCI Emerging Markets UCITS ETF

        View Fund Details

        SPF7 GY

        SPF7 GY

        SPDR® MSCI Emerging Markets Climate Paris Aligned UCITS ETF (Acc)

        View Fund Details

        Investors with high conviction about the resurgence of China Tech may find MSCI EM Asia the most compelling solution. It offers concentrated exposure to the engine of global growth: China, India, Taiwan, and South Korea account for nearly 95% of the index in total.7

        SPYA GY

        SPYA GY

        SPDR® MSCI EM Asia UCITS ETF

        View Fund Details

        The MSCI EM Small Cap Index is at the other end of the spectrum. It is heavily underweight China (11% of the index) and overweight India (25% of the index).8 It remains a tool for investors seeking to embrace opportunities stemming from EM economic growth, but who may be more sceptical about Chinese equities’ prospects. 

        SPYX GY

        SPYX GY

        SPDR® MSCI Emerging Markets Small Cap UCITS ETF

        View Fund Details

        Emerging Markets Dividend Aristocrats offer access to higher quality and more defensive stocks with proven ability to generate cash flow in a sustainable manner. As its exposure to China Tech is limited, EM Dividend Aristocrats may be more suitable for investors who expect an EM rebound but are sceptical about the Tech sector. Valuations are even more appealing than in broader EM indexes.

        SPYV GY

        SPYV GY

        SPDR® S&P® Emerging Markets Dividend Aristocrats UCITS ETF (Dist)

        View Fund Details

        Figure 4: Emerging Market Country Exposure Varies by Index

        Emerging market country exposures vary by index

        Figure 5: Sector Exposure Varies by Index

        More on Equities

        MARKETING COMMUNICATION

                                           

        FOR PROFESSIONAL INVESTORS USE ONLY.

         

        SSGA SPDR ETFS MAY NOT BE AVAILABLE OR SUITABLE FOR ALL. SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.

         

        Investing involves risk including the risk of loss of principal.

         

        ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.

         

        The S&P 500® Index is a product of S&P Dow Jones Indices LLC or its affiliates (“S&P DJI”) and have been licensed for use by State Street Global Advisors.  S&P®, SPDR®, S&P 500®,US 500 and the 500 are trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and has been licensed for use by S&P Dow Jones Indices; and these trademarks have been licensed for use by S&P DJI and sublicensed for certain purposes by State Street Global Advisors. The fund is not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of these indices.

         

        The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.

         

        The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

         

        All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

         

        This content has been issued by State Street Global Advisors Europe Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 49934. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.

         

        FOR EUROPEAN SPDR ETFs and MANAGED FUNDS:

         

        Please refer to the Fund’s latest Key Information Document (KID) and Prospectus before making any final investment decision. The latest English version of the prospectus and the KID can be found at www.ssga.com/ch/en_gb/institutional/ic/fund-finder. A summary of investor rights can be found here:

         

        Managed Funds: https://www.ssga.com/library-content/products/fund-docs/summary-of-investor-rights/ssga-investors-rights-summary-non-etf-ireland.pdf

         

        SPDR ETFs: https://www.ssga.com/library-content/products/fund-docs/summary-of-investor-rights/ssga-spdr-investors-rights-summary.pdf

         

        Note that the Management Company may decide to terminate the arrangements made for marketing and proceed with de-notification in compliance with Article 93a of Directive 2009/65/EC.

         

        SPDR ETFs is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.

         

        SSGA SPDR ETFs Europe I & SPDR ETFs Europe II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organized as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorized as a UCITS by the Central Bank of Ireland.


        For Ireland Unit Trust:

        The State Street Ireland Unit Trust was authorised by the Central Bank of Ireland as unit trust pursuant to the Unit Trusts Act, 1990 and the European Communities (Alternative Investment Fund Managers Directive) Regulations 2013 (as amended) as a Retail Investor Alternative Investment Fund on 30 June 2015. This document should be read in conjunction with its Prospectus and Supplement. All transactions should be based on the latest available Prospectus and Supplement which contain more information regarding the charges, expenses and risks involved in your investment. Prospective investors may obtain these reports free of charge from State Street Global Advisors Europe Limited which is regulated by the Central Bank of Ireland.

         

        FOR STRATEGIES:

         

        This document provides summary information regarding the Strategy. This document should be read in conjunction with the Strategy's Disclosure Document, which is available from SSGA. The Strategy Disclosure Document contains important information about the Strategy, including a description of a number of risks.

         

        The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

        4978691.4.1.EMEA.INST

        Exp: 30.06.2025

        © [[]] %%State Street Corporation%%. All rights reserved.
          More Results

          From Sectors and Smart Beta to Fixed Income, SPDR Exchange Traded Funds (ETFs) give you wide access to diverse investment opportunities. Find out more.

          Okay
          Accept
          Decline