The second quarter of 2025 proved exceptionally strong for emerging and frontier markets, delivering returns of 12.0% and 10.6% respectively. Emerging markets even surpassed the S&P 500’s 10.9% gain, while frontier markets kept pace. Looking at the first half of the year, emerging markets returned 14.9%, outpacing the S&P 500’s 6.2% for the first time since 2017. Frontier markets outshone both, recording a 19.8% return.
This performance is striking, given the negative headlines around global trade, political instability, and geopolitical tensions. Much of the rebound reflects recovery from the sharp declines of late 2024, when emerging markets slipped 12.6% after peaking ahead of the U.S. election.
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Trade Tensions and Policy Shifts
The turning point came after U.S. tariff threats earlier this year. On April 2, Liberation Day, President Trump announced sweeping tariffs. Yet rising U.S. bond yields pressured the administration to delay implementation by 90 days, pushing the start date to July 9. In the meantime, small trade agreements—such as deals with the UK and Vietnam—helped ease investor concerns.
China was hit hardest, with tariffs pushing weighted average levels near 32%. Still, Beijing leveraged its dominance in rare earths, where it controlled 61% of mining and 91% of refining in 2024. Its decision to restrict exports disrupted U.S. auto supply chains, with Ford even halting production for a week due to shortages of rare earth magnets.
Markets responded favorably when reality proved less severe than feared. Currencies in emerging economies strengthened against the dollar, reflecting waning confidence in U.S. fiscal policy. The recently passed “Big Beautiful Bill” added to deficit concerns, further weakening the USD.
Regional Drivers of Performance
Taiwan and Korea Lead Emerging Markets
Two countries were standout contributors in Q2—Taiwan and South Korea.
Taiwan delivered a 26.3% return, supported by a 13.9% currency appreciation. Foreign investors increased exposure, while exporters reduced USD holdings. Tech giant TSMC reported a 48% year-on-year revenue jump in April, benefiting from pre-tariff buying.
South Korea surged 32.8%, its best performance in 26 years. Optimism stemmed from the election of a pro-business government, alongside policy support for cryptocurrency and AI innovation.
Frontier Markets Show Broad Strength
Frontier markets also impressed. The UAE posted a 12% return despite intra-quarter volatility. Africa delivered particularly strong gains, with Nigerian banks Guaranty Trust and Zenith Bank each rising nearly 30%. Despite these rallies, valuations remain attractive, with price-to-earnings multiples of just 2–2.5x, offering strong upside potential.
Emerging Europe Outperforms
Emerging European markets also delivered robust returns. The Balkans Fund gained 19.3%, while the New Europe Fund climbed 16.1% in Q2. Year-to-date, these funds are up 29.6% and 34.7% respectively. Stock selection combined with strong performance in Poland and Greece fueled these results, as global investors returned to European opportunities overlooked in prior years.
On-the-Ground Insights
Investor sentiment across emerging regions has improved. A recent trip to Brazil revealed optimism that the rate-hiking cycle has ended. With inflation cooling, investors see upside potential ahead of the 2026 presidential election. Market-friendly governor Tarcísio de Freitas of São Paulo has emerged as the leading candidate, boosting business confidence.
Elsewhere, engagement with corporates—such as during the Prosus investor day—underscored continued innovation and expansion opportunities. These insights highlight why regional perspectives remain essential for global investors.
Why Markets Are Gaining Ground
Three macro trends are creating a favorable environment for emerging and frontier markets:
- Softening U.S. Dollar – Currency strength in Asia, Africa, and Europe reflects investor skepticism about U.S. deficits and policy uncertainty.
- Falling Oil Prices and Inflation – Lower input costs ease pressure on both consumers and governments.
- A More Dovish Federal Reserve – Signals of interest rate cuts support capital flows into higher-growth, higher-yielding markets.
At the same time, global investors are reconsidering their heavy exposure to U.S. equities. Many are diversifying toward growth markets that offer lower valuations and stronger long-term potential.
Long-Term Drivers of Emerging and Frontier Markets
In a recent analysis, The Return of Emerging Markets?, we argued that these markets remain undervalued after a decade of underperformance. Key factors support a sustained recovery:
- Attractive Valuations: Emerging market equities are cheaper than U.S. stocks, despite superior growth prospects.
- Macroeconomic Tailwinds: Declining inflation and interest rates support earnings growth.
- Innovation Shift: From chipmaking in Taiwan to electric vehicles and batteries in China, innovation increasingly originates in emerging economies.
- Structural Advantages: Resource-rich nations, youthful populations, and rapid adoption of digital technologies provide long-term momentum.
However, risks remain. A durable rally will likely require a stronger recovery in China, where economic growth has slowed. Recent upticks in real estate prices in Beijing and Shanghai provide tentative signs of stabilization.
Frequently Asked Questions:
What were the key drivers of emerging market performance in Q2 2025?
Strong returns came from Taiwan and South Korea, supported by currency appreciation, tech sector growth, and pro-business policies.
How did frontier markets perform compared to emerging markets?
Frontier markets posted a 10.6% return in Q2 and 19.8% year-to-date, outperforming emerging markets and even developed economies.
Why are investors turning to emerging and frontier markets now?
Falling U.S. dollar, lower oil prices, easing inflation, and attractive valuations are making these regions more appealing.
Which sectors contributed most to Q2 2025 growth?
Technology, banking, and energy-related sectors led gains, with standout contributions from TSMC in Taiwan and Nigerian banks.
What role did U.S. trade policy play in market performance?
Despite tariff threats, delayed implementation and smaller trade deals reduced fears, boosting investor confidence in global markets.
How did currency movements affect returns?
Most emerging market currencies appreciated against the U.S. dollar, enhancing local equity returns and attracting more foreign capital.
Which frontier markets showed the strongest growth?
African markets, particularly Nigeria, delivered significant gains, while the UAE also showed resilience with 12% growth in Q2.
Conclusion
Emerging and frontier markets proved their resilience in Q2 2025, delivering stronger returns than developed markets and signaling renewed investor confidence. With supportive macroeconomic factors, currency appreciation, and sector-driven growth, these regions are positioned for continued expansion. While challenges such as China’s recovery and global trade tensions remain, the long-term outlook is highly favorable. For investors seeking growth, diversification, and undervalued opportunities, emerging and frontier markets represent one of the most compelling stories of 2025 and beyond.
