MARKET INSIGHTS

Weekly market commentary

Sep 08, 2025

Three drivers for emerging markets

Market take

Weekly video_20250908

Axel Christensen

BlackRock Chief Investment Strategist for Latin America

Opening frame: What’s driving markets? Market take

Camera frame

Emerging markets have had a stellar year so far. The return from global emerging debt is double that of U.S. Treasuries. And emerging market equities are up 20% versus the 14% for developed markets, according to MSCI indices. We identify three key drivers creating opportunities – yet see considerable dispersion across countries that demands a granular approach.

Title slide: Three drivers for emerging markets

1: A weaker U.S. dollar driving returns

First: Many emerging market currencies are up against a dollar that has fallen around 10% this year against major currencies. A weaker U.S. dollar is typically associated with stronger relative EM performance. It also means that, for dollar-based investors, any gains on emerging market assets get amplified as they’re converted back to U.S. dollars.

2: Improved macro backdrop

Second: An improved macro backdrop is driving outperformance in many emerging markets. We see structural changes in several countries that bode well for durable growth.

Plus, inflation has fallen back down to pre-pandemic levels in some emerging markets, and rate cuts are well underway. Impending rate cuts from the Federal Reserve will likely spur more countries to do likewise, since following the Fed reduces the risk of local currency depreciation. That’s why we think now is a good time to lock in today’s higher yields on emerging market debt.

3. Mega forces driving dispersion

Each country has a unique combination of mega forces that drive returns in different places. That’s why we seek out bright spots, while staying neutral broad emerging equities on a short-term horizon.

Outro: Here’s our Market take

A weaker U.S. dollar, an improved macro backdrop and dispersion from mega forces are driving performance in emerging markets. We seek bright spots in equities and prefer local-currency over hard-currency emerging market debt.

Closing frame: Read details: blackrock.com/weekly-commentary

Three drivers emerge

We see a weaker U.S. dollar, a steady macro backdrop and mega forces as core drivers of EMs this year – yet selectivity across countries and sectors is key.

Market backdrop

U.S. stocks ended the week flat and U.S. Treasury yields slid after Friday’s jobs report showed further slowing, undershooting consensus expectations again.

Week ahead

This week’s U.S. CPI is the last key data before the next Fed meeting. We look for the impact of tariffs on goods prices and weaker jobs growth on services prices.

Emerging market (EM) assets have performed well this year. We see three drivers creating opportunities, but selectivity across countries and sectors remains key. First: a weaker U.S. dollar. Second: a broadly stable macro backdrop, with rate cuts and strong growth in some countries. Third: mega forces like artificial intelligence and geopolitical fragmentation driving dispersion. We stay neutral broad EM equities, seeking bright spots, and prefer local-currency to hard-currency EM debt.

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Market commentary Asset class views
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Weaker dollar boosts EM returns
Regional equity and U.S. dollar index performance, 2025

The chart shows the MSCI emerging markets equity index generating better returns than the developed market index, while the returns generated by the U.S. dollar weaken.

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, MSCI, with data from LSEG Datastream, September 2025. Note: Index proxies used are MSCI EM U$, MSCI EM, MSCI World and the U.S. dollar DXY index.

Emerging markets have had a stellar year so far. In fixed income, global emerging debt has returned nearly 9%, versus the 4.5% of U.S. Treasuries. In equities, the MSCI EM Index is up 20%, well above the 14% rise in the developed market index MSCI World. See the red and green lines on the chart. Yet that masks considerable dispersion: MSCI China is up 29%, Poland over 50% and South Korea over 40%, according to LSEG data. In China, tariff de-escalation and government efforts to revive consumption and investor confidence have boosted near-term sentiment. Elsewhere, country drivers often tie back to longer-term forces: Korea has gained from cheap valuations and its role in the AI and chip supply chain; Vietnam from its position in rewired supply chains; Poland from easing geopolitical risk. This shows why a granular approach is key as mega forces shape EM returns in different ways.

Dollar weakness has helped drive EM returns this year. Many EM currencies are up against a dollar that has fallen about 10% this year against major currencies, LSEG data show. Weaker dollar periods have typically coincided with stronger relative EM performance, including equities, as repayment of dollar-denominated debt becomes cheaper, supporting earnings. It also amplifies EM returns for dollar-based investors by boosting the value of local-currency gains when converted back to dollars.

An improved macro backdrop

Another driver for EMs is an improved macro backdrop. The IMF projects the EM-DM growth gap narrowing in 2025 from the 2010-2019 average – but that masks structural changes in several countries that we think bode well for durable growth. For example, India and Vietnam are making strides developing their services and manufacturing industries, respectively; Mexico and Brazil are exhibiting monetary discipline; and Chile’s strong financial institutions add stability. Inflation is already back below pre-pandemic levels in several EMs and rate cuts are well underway. Mexico, for example, has cut five times this year, Indonesia four times and Poland three. Pending Federal Reserve rate cuts – though likely modest in our view – would give EM central banks more room to ease, as following the Fed reduces the risk of local currency depreciation. We see opportunities to lock in yields in local-currency bonds in Hungary, the Czech Republic, South Africa, Brazil, Mexico and Colombia.

The third driver is mega forces. As we’ve long said, mega forces – not macro factors – are the new drivers of returns, and their impact is uneven across EMs. That’s why we seek out bright spots, while staying neutral broad emerging equities in the near term. The rewiring of supply chains is benefiting countries like Mexico, Brazil and Vietnam, in our view. Taiwan and South Korea are major players in developing the semiconductors needed for the AI buildout, and China is advancing its own AI technology. South American countries like Chile and Peru are benefitting from demand for critical materials needed for the low-carbon transition. On a longer-term horizon, we think India can leverage its younger population and growing digitization to scale into a cutting-edge digital economy. India’s promise is one reason we hold a long-term, strategic overweight to EMs.

Our bottom line

Dollar weakness, resilient economies and mega forces are shaping EM performance. Dispersion reinforces our selective stance. We stay neutral on broad EM equities, seeking bright spots, and prefer local-currency EM debt.

Market backdrop

The S&P 500 hit another all-time high on Friday before ending the week little changed. Government bonds globally began the week under pressure, with the 30-year Treasury yield briefly topping 5.00%. The U.S. two-year Treasury yield then fell to 3.51% and the 30-year to 4.76% after the August jobs report showed job growth slowing sharply. Yet layoffs have not greatly increased and wage growth is still too high for inflation to hit the Fed’s 2% target. We expect a quarter-point cut next week.

This week, U.S. CPI data may shed more light on the impact of tariffs. Tariffs are already pushing up prices in appliances and furniture. But last week’s weak U.S. jobs report and slowing wage growth means the Fed is highly likely to cut rates next week. In Europe, we expect the European Central Bank (ECB) to leave interest rates unchanged as policymakers wait to see the impact of U.S. tariffs on euro area activity.

 

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while brent crude is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of September 4, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.

Sep. 7

Japan trade balance; China trade balance

Sep. 9

China CPI

Sep. 11

U.S. CPI, ECB policy rate decision

Sep. 10-17

China total social financing

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, September 2025

  Reasons
Tactical  
U.S. equities Policy uncertainty and supply disruptions are weighing on near-term growth, raising the risk of a contraction. Yet we think U.S. equities will regain global leadership as the AI theme keeps providing near-term earnings support and could drive productivity in the long term.
Using FX to enhance income FX hedging is now a source of income, especially when hedging euro area bonds back into U.S. dollars. For example, 10-year government bonds in France or Spain offer more income when currency hedged than U.S. investment grade credit, with yields above 5%.
Seeking alpha sources We identify sources of risk taking to be more deliberate in earning alpha. These include the potential impact of regulatory changes on corporate earnings, spotting crowded positions where markets could snap back and opportunities to provide liquidity during periods of stress.
Strategic  
Infrastructure equity and private credit We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. We think private credit will earn lending share as banks retreat – and at attractive returns.
Fixed income granularity We are overweight short-term inflation-linked bonds as U.S. tariffs could push up inflation. Within nominal bonds, we favor developed market (DM) government bonds outside the U.S. over global investment grade credit, given tight spreads.
Equity granularity We favor emerging over developed markets yet get selective in both. Emerging markets (EM) at the cross current of mega forces – like India – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook.

Note: Views are from a U.S. dollar perspective, September 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2025

Legend Granular

The table below reflects our views on a tactical horizon and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at times of heightened volatility.

Asset   Tactical view Commentary
Equities      
United States   United States: tactical Overweight +1 We are overweight. Policy-driven volatility and supply-side constraints are pressuring growth, but we see AI supporting corporate earnings. U.S. valuations are backed by stronger earnings and profitability relative to other developed markets.
Europe   Europe: tactical Neutral 0 We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet we are watching how the bloc tackles its structural challenges before turning more optimistic. We note selective opportunities in financials and industries tied to defense and infrastructure spending.
UK   UK: tactical Neutral We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
Japan   Japan: tactical Overweight +1 We are overweight given the return of inflation and shareholder-friendly corporate reforms. We prefer unhedged exposures as the yen has tended to strengthen during bouts of market stress.
Emerging markets (EM)   Emerging markets: tactical Neutral We are neutral. Valuations and domestic policy are supportive. Yet geopolitical tensions and concerns about global growth keep us sidelined for now.
China   China: tactical Neutral We are neutral. Trade policy uncertainty keeps us cautious, and policy stimulus is still limited. We still see structural challenges to China’s growth, including an aging population.
Fixed income      
Short U.S. Treasuries   Short U.S. Treasuries: tactical Overweight +1 We are overweight. We view short-term Treasuries as akin to cash in our tactical views. We would still lean against the market pricing of multiple Fed rate cuts over the next year.
Long U.S. Treasuries   Long U.S. Treasuries: tactical Underweight -2 We are underweight. Persistent budget deficits and inflation pressures could drive term premium up over the long term, but we see scope for lower yields near term. We prefer intermediate maturities.
Global inflation-linked bonds   Global inflation-linked bonds: tactical Neutral We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds   Euro area government bonds: tactical Neutral We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to U.S. Treasuries. We prefer peripheral bonds such as in Italy and Spain.
UK gilts   UK gilts: tactical Neutral We are neutral. Gilt yields are off their highs, but the risk of higher U.S. yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation.
Japanese government bonds   Japanese government bonds: tactical Underweight -1 We are underweight. We see room for yields to rise further on Bank of Japan rate hikes and a higher global term premium
China government bonds   China government bonds: tactical Neutral We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS   U.S. agency MBS: tactical Overweight +1 We are overweight. We find income in agency MBS compelling and prefer them to U.S. Treasuries for high-quality fixed income exposure.
Short-term IG credit   Global investment grade: tacticalOverweight +1 We are overweight. Short-term bonds better compensate for interest rate risk.
Long-term IG credit   Long-term IG credit: tactical Underweight -1 We are underweight. Spreads are tight, so we prefer taking risk in equities. We favor Europe over the U.S.
Global high yield   Global high yield: tactical Neutral We are neutral. Spreads are tight, but corporate fundamentals are solid and it provides attractive income.
Asia credit   Asia credit: tactical Neutral We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging hard currency   Emerging market-hard currency: tactical Underweight We are underweight. Spreads to U.S. Treasuries are near historical averages. Trade uncertainty has eased, but we find local currency EM debt more attractive.
Emerging local currency   Emerging market-local currency: tactical Neutral We are neutral. Debt levels for many EMs have improved, and currencies have held up against trade uncertainty. We prefer countries with higher real interest rates.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2025

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex UK: tactical Neutral We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet we are watching how the bloc tackles its structural challenges before turning more optimistic. We note opportunities in financials and industries tied to defense and infrastructure spending.
Germany Germany: tactical Neutral We are neutral. Valuations and earnings growth are supportive relative to peers, especially as ECB rate cuts ease financing conditions. Prolonged uncertainty about potential tariffs and fading euphoria over China’s stimulus could dent sentiment.
France France: tactical Neutral We are neutral. Ongoing political uncertainty could weigh on business conditions for French companies. Yet only a small share of the revenues and operations of major French firms is tied to domestic activity.
Italy Italy: tactical Neutral We are neutral. Valuations are supportive relative to peers. Yet past growth and earnings outperformance largely stemmed from significant fiscal stimulus in 2022-2023, which is unlikely to be sustained in the coming years.
Spain Spain: tactical owerweight +1 We are overweight. Valuations and earnings growth are supportive compared to other euro area stocks. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI.
Netherlands Netherlands: tactical neutral We are neutral. The Dutch stock market’s tilt to technology and semiconductors — key beneficiaries of rising AI demand—is offset by less favorable valuations and a weaker earnings outlook compared to European peers.
Switzerland Switzerland: tactical Neutral We are neutral, consistent with our broader European view. Earnings have improved, but valuations remain elevated compared to other European markets. The index’s defensive tilt may offer less support if global risk appetite stays strong.
UK UK: tactical neutral We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
Fixed income    
Euro area government bonds Euro area government bonds: tactical Neutral We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to U.S. Treasuries. We prefer peripheral bonds such as in Italy and Spain.
German bunds German bunds tactical Underweight -1 We are underweight. Market pricing aligns with our policy rate expectations, but growth support fiscal stimulus is likely to push up neutral rates. More balanced inflation risks and bond issuance could push term premium up.
French OATs French OATss: tactical Underweight -1 We are underweight. France continues to face challenges from elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms.
Italian BTPs Italian BTPss: tactical Neutral We are neutral. The spread over German bunds looks tight given its large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. Given the domestic political pushback, we do not think Italy will boost defense spending to such an extent that fiscal stability concerns resurface.
UK gilts UK gilts: tactical neutral We are neutral. Gilt yields are off their highs, but the risk of higher U.S. yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation.
Swiss government bonds Swiss government bonds: tactical tactical Neutral We are neutral. Markets are expecting policy rates to return to negative territory, which we deem as unlikely.
European inflation-linked bonds European inflation-linked bonds: tactical Neutral We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term.
European investment grade credit European investment grade credit: tactical Neutral We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the U.S., as quality-adjusted spreads are relatively wider.
European high yield European high yield: tactical owerweight +1 We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality and less sensitivity to interest rate swings compared with the U.S. Spreads adequately compensate for the risk of a potential rise in defaults, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, September 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

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Meet the authors
Jean Boivin

Jean Boivin

Head – BlackRock Investment Institute
Wei Li

Wei Li

Global Chief Investment Strategist – BlackRock Investment Institute
Ben Powell

Ben Powell

Chief Investment Strategist for the Middle East and APAC — BlackRock Investment Institute
Axel Christensen

Axel Christensen

Chief Investment Strategist for Latin America — BlackRock Investment Institute