Emerging Market Equity Funds Lure Investors, Borsa Istanbul the Laggard 

In 2025, emerging market (EM) equity funds have taken the lead in global investment performance, driven by attractive valuations, years of underallocation by global investors, and a reprieve from economic pressures following U.S. President Donald Trump’s pause on tariffs.

Latin America and Emerging Europe Outperform

According to LSEG data, funds tracking equities in Latin America and emerging Europe have both gained around 24% year-to-date, while broader emerging market equity funds are up 9.3%.

Funds focused on Morocco, Colombia, Greece, Brazil, and Portugal have each returned over 30%, highlighting the strength in diverse EM regions. In contrast, U.S.-focused equity funds have returned just 0.17%, while global equity funds are up 6.8%.

This trend marks a reversal for EMs after years of underperformance versus developed markets, particularly U.S. equities, which were buoyed by a tech rally driven by artificial intelligence.

Investors Turn Away from U.S. Assets

This year, however, concerns over recession risks, fiscal instability, and Trump’s erratic policy stance have prompted many investors to reduce exposure to U.S. assets.

According to LSEG Lipper, EM equity funds attracted $10.6 billion in inflows in the first five months of 2025—a 43% increase compared to the same period last year.

Malcolm Dorson, senior EM portfolio manager at GlobalX, points out that U.S. portfolios remain underexposed to emerging markets. U.S. investors typically allocate only 3–5% to EMs, compared to their 10.5% weighting in the MSCI Global Index and ~25% share of global market capitalization.

“Allocators are dangerously short a deeply discounted and fast-growing asset class,” said Dorson.

Fundamentals Improving, Easing Expected

Analysts also highlight improving macro fundamentals. Latin America is largely insulated from tariffs due to trade deficits with the U.S., while Asian economies are pivoting toward domestic consumption.

J.P. Morgan this week upgraded EM equities from “neutral” to “overweight,” anticipating that all EM central banks (excluding Brazil) will begin monetary easing, which could boost economic activity and enhance equity appeal.

Tech Rally Reignites Interest in China and Hong Kong

AI-driven tech gains have renewed interest in Chinese and Hong Kong equities, with investors attracted to low-cost innovation plays such as DeepSeek.

Alison Shimada of Allspring Global Investments emphasized the resilience of Mexico and Brazil, despite global trade tensions, while also highlighting:

“The China consumer story is especially compelling right now. Beijing is highly focused on stimulating domestic demand. India may be overbought, but there are pockets of opportunity in power and non-bank financials.”

EM Valuations Remain Attractive

At the end of May, the MSCI EM Index was trading at a forward 12-month P/E of 11.96, just below its 10-year average of 12.1.

In comparison, the MSCI USA and MSCI World indexes are trading at 20.5 and 18.1, respectively—both well above their 10-year averages of 18.8 and 16.9.

📉 Why Is Borsa Istanbul Losing Value?

The BIST 100 Index fell by 3.23% last week, with sharp declines in banking (-1.97%) and holding (-1.41%) sectors leading the losses.

Key reasons behind the selloff in Turkish equities include:

• High Inflation and Interest Rates: Persistent inflation and tight monetary policy are hurting corporate profitability and weakening investor sentiment.

• Political Uncertainty: Events like the detention of Istanbul Mayor Ekrem İmamoğlu have increased domestic political tension, shaking investor confidence.

• Weak Investor Trust: Ongoing political pressure on the opposition (CHP) undermines the long-term restoration of trust in Turkish markets.

That said, foreign funds less sensitive to political noise and confident in Turkey’s strong lira and high interest rate policy may still take short-term trading positions. In fact, Borsa Istanbul has seen hot money inflows for five straight weeks, and renewed foreign interest in Turkish government bonds has helped limit downside risks.

The year-end target for the BIST 100 Index remains 13,500 points, a goal that could be attainable during the summer months, especially if the Central Bank of Turkey rebuilds FX reserves and Parliament enters recess, reducing political noise.

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