1. Tariff uncertainty: Tensions between the United States and China have resurfaced after an agreement in Geneva in May to temporarily lower tariffs and start negotiations on a mutually agreeable solution. The United States has accused China of withholding approval for the export of rare earths, and China has countered that the United States is not approving licences for the export of semiconductors and has cancelled visas for Chinese students. The bigger issue for investors is how China will respond in the long term to the US policy of containments toward China. Continued uncertainty appears to be the only certainty.

2. Emerging market outperformance: Over the past 12 months, developed markets, as represented by the MSCI World Index, have outperformed EMs. However, year-to-date the performance trends have reversed. The MSCI China Index has led the way on policy easing and a reversal of prior market pessimism. US dollar weakness has contributed to emerging market outperformance, as has attractive valuations. If these trends persist in the second half of 2025, we believe the outperformance could continue.

3. EM foreign exchange (FX) appreciation: The US dollar has been on a weakening trend year to date as the trade war and policy uncertainty has led foreign investors to question the sustainability of US exceptionalism. Asian currencies including the Thai baht and new Taiwan dollar have reached 12 months highs while the Brazilian real and Mexican peso have reached year-to-date highs. US dollar weakness is typically positive for EM equity and fixed income performance. However, we note that these historical relationships may break down in the future given the apparent decline in US exceptionalism. This will require careful monitoring by investors. 

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