Goldman Sachs has increased its target for MSCI emerging market index to 1,220 in the next 12 months. That’s 11% away from the current level, and it would imply a gain of 13% compared to the index’s 2024 close.

A 13% gain in 2025 would be the sharpest annual rally for the MSCI EM Index since 2020 when it gained 18.3%. Typically, in an increasingly uncertain world, the US market and its dollar would be a safer bet. However, emerging-market stocks have gained 3.7% — beating the 1.9% advance for the MSCI World Index and a 0.7% drop in the S&P 500 — in 2025, a sign of a reversal in their underperformance of recent years, according to Bloomberg data at the end of March 5.

The market mood seems to be turning in favour of emerging markets, partly, because Trump is so unpredictable. “The dollar appears to be losing some of its safe haven appeal,”  Phoenix Kalen, head of emerging markets research at Societe Generale in London, told the news agency amidst the tariff war, and the subsequent flip flops, waged by the US President Donald Trump.

Investors must keep in mind that emerging markets — China, India, Taiwan, South Korea, and Brazil made for 46.9% of the MSCI EM Index at the end of 2024 — have rarely given more returns than the developed markets like the US in the last decade and half. So, will 2025 see a break from the trend?

There are at least three reasons why investors, particularly international ones, made less money out of their EM bets. An MSCI report in February attributed the underperformance to share dilution, local currencies weakening against the dollar, and China’s domestic troubles.

‘Dilution’ above refers to the process raising fresh capital with new shares, which reduces the value of the stake held by existing shareholders. Simply put, in the last decade when capital was relatively cheap due to stimulus measures, more EM promoters raised money from the market to grow their business. On the other hand, in developed markets like the US, owners used the excess liquidity to buy back shares to prop up the value of stake held by existing shareholders.

Now, the likes of Goldman Sachs and others believe that at least two (the trend in dollar and China) out of the three factors have turned a corner. “You want to keep out of the euro and own the yen, which is now the new safe haven as the US is getting to look very dangerous and US exceptionalism will suffer from the costs of Trump’s commercial tariffs,” David Roche of Quantum Strategy told CNBC earlier this week.

The weakness in the US dollar may be part of Trump’s long-held promise to make manufacturing in America more competitive.

Meanwhile, China has promised more stimulus and the advancement made by Deepseek has forced investors to reassess their view of the world’s second largest economy. Shanghai Composite has gained 25% from its Sep 2024 lows after a 27% fall in the preceding three years. A good chunk of the money that propped up the Chinese stocks went from their relatively expensive peers in India.

The UBS index of the magnificient seven tech stocks (Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla) is down nearly 12% from its peak on Dec 24 last year. Much of the fall came after China’s Deepseek showed that the race for AI domination does not necessarily depend on how many billions you have to spare.

Jahangir Aziz of JPMorgan warns against irrational exuberance in favour of EMs. “It is never the case that when US languishes and the rest of the world does the…  What we’re seeing is a market adjusting to more realistic view of US exceptionalism, which is why you’re seeing the equity markets in Europe and China actually outperform that S&P 500 or Dow (Jones). But it’s very hard to see in a general risk of environment flows being attracted to emerging markets,” he told CNBC-TV18. You can watch the conversation here: