• J.P. Morgan Asset Management highlights that emerging markets (EM) are set to benefit from a weaker or stable U.S. dollar, with EM equities outperforming in 2025.
  • The firm notes the "virtuous" strong-dollar cycle has broken due to U.S. growth downgrades and expectations of Federal Reserve rate cuts, limiting further dollar upside.
  • EM assets, including equities and local-currency debt, are seeing improved conditions, with lower dollar-debt burdens and supportive capital flows, though risks from geopolitical tensions and potential USD re-strengthening remain.

In a recent analysis, J.P. Morgan Asset Management and J.P. Morgan Research argue that emerging markets are positioned to capitalize on a weaker or at least non-strengthening U.S. dollar, a dynamic already visible in 2025 performance and investor flows. According to people familiar with the matter, the firm's June 2025 EM equity paper identifies this as one of five key reasons to increase EM allocations now, citing historical patterns where EM equities and economies have thrived during such periods.

The shift comes as consensus U.S. growth estimates were cut from about 2.3% to 1.4% in March–April, with softer labor market data increasing expectations of Fed rate cuts and pressuring the dollar lower. J.P. Morgan notes that the relative deterioration is sharper in the U.S. compared to other regions, undermining the dollar's strength and encouraging diversification away from U.S. assets. This has led to a standout year for EM equities: the MSCI EM index is up approximately 22% year-to-date, outperforming the S&P 500 by roughly 12 percentage points, with dollar depreciation against many EM currencies cited as a core tailwind.

Mechanisms behind this benefit include cheaper dollar debt for EM sovereigns and corporates, which reduces local-currency servicing burdens and lowers default risk, as well as improved terms of trade for exporters. J.P. Morgan documents that when the USD is weak, EM equities tend to outperform global equities, aided by valuation discounts and investor rotation. EM equity valuations are now more attractive than at any point in the past five years, offering both growth and diversification potential, according to the firm's research.

On the policy front, EM central banks, having maintained restrictive stances in prior years, now have room to stimulate and are in easing cycles, which interacts with Fed policy to shape EM currency and asset performance. However, J.P. Morgan stresses that political risks, such as U.S. tariffs and broader trade policy, could reintroduce volatility. Concerns that aggressive U.S. tariffs might slow U.S. growth and raise inflation have paradoxically helped weaken the dollar by eroding the attractiveness of U.S. assets, but any escalation could reverse this trend.

Looking ahead, J.P. Morgan expects limited upside for the USD in the short term, with EM growth projected to slow to around a 2.4% annualized pace in the second half of 2025, though from a stronger starting point. The firm's mid-year outlook suggests that if the dollar remains weak or range-bound, EM local-currency debt and equities could deliver double-digit total returns over the next 12 months. Yet, it continuously flags geopolitical risks and potential renewed inflation as swing factors that might force higher U.S. yields and a return to dollar strength, which would pose headwinds for EM.

In related developments, other asset managers like Schroders and BlueOrchard have echoed similar views, forecasting strong EM local-debt returns and low default rates, contingent on no sharp USD re-strengthening. J.P. Morgan's analysis concludes that the multi-year strong-dollar cycle is likely over or at least interrupted, creating a more favorable strategic backdrop for EM allocations, particularly in regions like Asia and India with robust structural growth. Efforts to reach J.P. Morgan for additional comment were not immediately successful, but sources indicate the firm remains cautious amid ongoing market uncertainties.

Correction: An earlier version misstated the year-to-date performance of the MSCI EM index; it has been updated to reflect the correct figure of approximately 22%.