J.P. Morgan has increased its year-end target for the MSCI Emerging Markets Index to 1,250, up from 1,150. This change is attributed to appealing valuations, a decline in the U.S. dollar, and decreased uncertainty surrounding U.S. trade policy. The firm holds an ‘overweight’ view on emerging markets, suggesting optimism for their potential performance. Despite trade tensions shaping the sentiment in 2025, there could be positive outcomes in the latter half of the year.
The index has risen 13.5% so far this year amid growing doubts about U.S. assets, compounded by erratic trade policies. Concurrently, the U.S. dollar index has seen a 10% reduction. J.P. Morgan anticipates continued weakness in the dollar, potentially prompting diversification towards emerging market assets. Interest rate reductions are expected in 19 out of 21 emerging market countries during the second half of 2025, due to easing inflation and softer growth. Notably, Brazil’s real and Mexico’s peso are predicted to be the top yielding currencies among emerging markets.
Key Drivers of Market Shift
What we’re seeing now is a sustained re-pricing of risk, especially in regions that have long carried a valuation discount. With the MSCI Emerging Markets Index revised upward by J.P. Morgan, from an earlier target of 1,150 to the newly stated 1,250 by year’s end, the foundation for this change in stance appears deeply rooted. Three drivers stand out: the declining strength of the U.S. dollar, more reasonable asset prices across developing countries, and diminished trade unpredictability from Washington.
Put plainly, markets are shifting away from crowded trades in the U.S. and towards areas that have lagged. This 13.5% rise since the start of the year is more than just a recovery; it’s being built on renewed confidence. When the dollar weakens by 10%, as it has done, there’s often a knock-on effect. We begin looking elsewhere for returns: not just for equity gains but also for diversification and yield.
Traders should keep an eye on direction, not just speed. With Rajan forecasting rate reductions in nearly every major emerging economy, short-term interest rate differentials may widen. That would leave room for carry strategies to flourish, particularly in currencies where local inflation is already subsiding.
Brazil and Mexico are not just standouts; they’re providing real yield when adjusted for inflation, something relatively rare at present. These currencies, backed by supportive central bank policies and improving fiscal positions, are likely to attract flows from more yield-starved corners of the globe.
Strategy for Second Half of the Year
In our view, positioning into the second half must reflect these concrete factors. It’s not enough to follow the index rise—what matters is participating in the parts of the market where policy is predictable, returns are underpinned by improving local dynamics, and sentiment is gaining traction.
Rate expectations play into this too. With lower inflation profiles being factored into asset prices, especially in Asia and Latin America, implied volatility could trend lower. We may see tighter options pricing over the next few weeks, which makes it worth reassessing premium collection strategies.
Temporarily disruptive headlines are likely to continue, particularly on trade and fiscal fronts, but those are not the signals we act on. Instead, keep laser-focused on continued softening in U.S. data and the ripple effect it sends through foreign exchange channels. When the dollar retreats and global liquidity pivots, pressure builds to reallocate.
The time to observe was late last year; now the time is to engage. Watanabe has already laid the groundwork. As near-term rate paths become clearer, expect to find more sustained trend movements rather than choppy ranges. For that reason, duration exposure on rates trades in select local markets could benefit from tighter stop management and more frequent rebalancing.
Positioning should be done by increments. Front-run nothing. Let signals come naturally—real flows, rate announcements, CPI prints. When credible fiscal plans are put forward or central banks take a measured tone, trends follow.
And as spreads tighten and volatility lessens, beware of low liquidity traps. In these moments, when direction is less uncertain but participation fades, spreads can widen sharply without fundamental cause. For that reason alone, caution, not hesitancy, is appropriate.
We’ve already moved past the point of speculation into the territory of execution. Let the numbers guide—nothing in the data now supports complacency.
