Three things we are thinking about today
Tariffs in emerging markets (EMs): The August 1 deadline for reaching a trade agreement with US President Trump has passed, and many EMs have failed to secure a deal. India, Brazil and Taiwan are among the larger countries that are facing tariffs of 25%/40%/20% respectively. We expect negotiations to continue and remain optimistic that an agreement will eventually be reached, possibly at the new normal tariff rate of 15% that Europe and Japan recently agreed to with Trump.
Banks and interest rates: The US Federal Reserve (Fed) and the Bank of England appear to be adopting a wait-and-see approach to further interest rate cuts, while the European Central Bank may have reached the end of its easing cycle. The impact of rising tariffs on US inflation is one factor giving the Fed pause for thought. Nevertheless, it is clear to us that the global easing cycle is ending, with positive implications for bank stocks, which tend to experience falling net interest margins and in turn profitability as rates decline.
China growth air pocket: There are signs that the Chinese economy may be going through a growth air pocket. The government’s crack-down on disorderly competition in the manufacturing sector is showing signs of impacting output, as signaled by recent purchasing manager indexes showing a softening in manufacturing output. While reducing disorderly competition may reduce deflation risks, it may also require additional stimulus to support growth.
Outlook
Our China industrials analyst attended an exhibition on humanoid robots, where the aim was to promote the construction of a robust robotics industrial ecosystem. While commercialization for general humanoid robots is still developing, there seem to be clear pathways for pan-humanoid robots. A pan-humanoid robot, in general, is a robot designed to emulate human capabilities and traits.
While the analyst was of the view that there were no large product breakthroughs from robotic original equipment manufacturers (OEMs), the development of pan-humanoid robot applications is developing rapidly. The commercialization of the latter is also evident, such as robotic vans in logistics companies and autonomous forklifts in warehouses.
The analyst sees the complete supply chain is starting to be built up entirely in China. Constant research and development is ongoing, with a clear trend toward making these robotics more lightweight. She observed that industry participants are actively seeking new materials to redesign components to make them lighter, and also more cost-effective.
Another trend she spotted is the expansion of humanoid applications. For example, a startup that used to design and manufacture robotic hands for disabled people is now expanding its expertise to making hands for humanoid robots. These hands could eventually be developed to handle heavier and larger weights, assisting manual labor tasks in supermarkets and industrial baking. Our analyst is hopeful that there could eventually be listed companies specializing in the development of humanoid limbs to serve different purposes.
The examples above scratch the surface of how China is advancing in its technology. The bottom-up view of the investment landscape is a key part of our uncommon process. The ability to cross reference emerging growth trends, stress-test our assumptions and engage with industry leaders contribute to our uncommon insights, which we believe is our primary strength.
Market review: July 2025
EM equities rose in July 2025. New trade deals between the United States and selected countries infused some positive sentiment into equities globally. For the month, the MSCI EM Index returned 2.02%, while the MSCI World Index rose by 1.31%.
The emerging Asia region rose, with countries showing mixed returns. Chinese equities advanced on renewed optimism in artificial intelligence (AI)-related stocks. Infrastructure and power companies also gained on China’s launch of the construction of a US$167 billion hydropower project in Tibet. While the latter development has not been explicitly touted as a stimulus, our China equity portfolio manager thinks it could be—especially with the desire to transform energy usage away from coal. China’s campaign to curb excessive competition was also a catalyst. US-China relations continue to thaw, with several meetings between Chinese and US officials scheduled. South Korea’s advance was partially driven by shares of automakers, which rose sharply on hopes that there could be a trade deal with the United States to reduce tariffs. However, weaker second-quarter results of South Korean automakers capped their gains. The trade deal between South Korea and the United States culminated in a 15% tariff rate. Our South Korean equity analyst quipped that while this is not the best rate, it is not the worst either; this rate is in his view, acceptable. The South Korean government unveiled a tax reform plan to restore fiscal soundness.
In Taiwan, its most valuable company’s share price rose after releasing second-quarter 2025 earnings results, where profits hit a historical high as it benefitted from surging demand for semiconductors used in AI applications. Indian equities slid overall. Returns were dictated by quarterly earnings and higher US tariffs on India as compared to some other countries. The country’s inflation in June eased to the lowest in more than six years, keeping it below the central bank’s target for five months in a row. Several countries in Southeast Asia struck tariff deals with the United States.
Equities in the emerging Europe, Middle East and Africa region rose, taking heed from global markets. Worries of a looming tariff deadline between the United States and other countries receded, and strong corporate earnings managed to negate some weakness from oil prices. Saudi Arabia’s equity markets were affected by mixed earnings and several blue-chip stocks trading ex-dividend. Qatar’s advance was partially driven by banking stocks from upbeat results. Shares of a Qatari index heavyweight, an Islamic bank, rose as investors positioned themselves ahead of a dividend eligibility cutoff to secure an upcoming payout.
Equities in the emerging Latin America (LatAm) region fell. While previously relatively insulated from US tariffs compared to other regions, several countries in emerging LatAm received higher adjusted levels of tariffs. US tariffs on selected Brazilian goods now stand at 50%—a large jump from the 10% set in April—and Mexican goods are now subject to a 25% tariff rate. Mexican equities were further pressured after a listed retailer posted weaker-than-expected second-quarter results, resulting in the stock’s steepest daily decline since 2020.
Index Definitions
Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com
- The MSCI All Country World Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global developed and emerging markets.
- The MSCI Brazil Index is designed to measure the performance of the large- and mid-cap segments of the Brazilian market.
- The MSCI China Index captures large- and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs).
- The MSCI EM Asia ex Japan Index captures large- and mid-cap representation across two of three developed markets (DM) countries (excluding Japan) and eight emerging markets (EM) countries.
- The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America.
- The MSCI EM EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA).
- 7. The MSCI EM Index is a free float-adjusted, market capitalization-weighted index designed to measure the equity market performance of global emerging markets.
- The MSCI India Index is designed to measure the performance of the large- and mid-cap segments of the Indian market.
- The MSCI Mexico Index is designed to measure the performance of the large- and mid-cap segments of the Mexican market.
- The MSCI South Korea Index is designed to measure the performance of the large- and mid-cap segments of the South Korean market.
- The MSCI Turkey Index is designed to measure the performance of the large- and mid-cap segments of the Turkish market.
- The MSCI World Index captures large- and mid-cap representation across 23 developed market countries.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
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