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Three things we are thinking about today

Moody’s downgrades US credit rating: Questions over the safe-haven status of the United States as an investment market, a weakening US dollar and unpredictable policies have investors increasingly diversifying away from the United States.1 This may act as a catalyst for other asset classes, for example, emerging market (EM) equities. With this decision, Moody’s is the last of the three major agencies to downgrade the United States from the highest credit rating..

Tariff deadline looms: At the time of writing, few countries have brokered deals with the United States on reciprocal tariffs. A pleasant surprise, however, was that China and the United States have reached a mutual agreement; this was once expected to be the toughest negotiation. The final days of June have seen an increase in diplomatic activity, but the pace of negotiations still remains drawn-out.

Succession planning: With 11 months left until the end of Federal Reserve (Fed) Chair Jerome Powell’s term, US President Donald Trump has stated that he will announce a successor. The divergence between the president’s and the US central bank’s views on interest rates has been widely published, but announcing a successor this far in advance would be the first such action in the 111-year history of the Fed.2 The president has fervently reiterated his stance on reducing interest rates, and his pick would likely echo the same view.

Outlook

Amid tariff-induced uncertainty, two of our portfolio managers had a week-long trip to Vietnam. The purpose of the visit was to understand the repercussions of US tariffs on our portfolio holdings. During this trip, the portfolio managers met with corporate management teams, policymakers and market participants.

Seeking new foreign direct investment (FDI) pathways

Our ASEAN analyst’s view is that Vietnamese equities should remain range-bound until there is further clarity on tariffs. Should the current level of US tariff on Vietnamese goods—46%— remain in place, we believe it will have impact on economic growth and a risk of downward revisions to earnings will also emerge. It is no secret that Vietnam is among the top, if not the top, FDI destination from both the East and West. Vietnam continues to aspire to be a manufacturing hub for exports to the rest of the world, but policymakers are now angling for domestic-led growth. Vietnam’s goal is to rely less on being an assembler in supply chains and to move upwards and outwards into higher value-added sectors, embracing technology transfers and talent development.

The portfolio managers found that management and policymakers had a consensus—the government is actively making the country a choice destination for FDI. One of the initiatives of the current government is to increase its efficiency, slashing away layers of decision-making internally by up to 70%. This will, we think, spur inflows of FDI.

Opportunities from China

Should US tariffs on China not come to fruition, would Vietnam’s place in the integration of China’s supply chain be threatened? A private company had a response to the above question. In the company’s view, the scale that China offers today is unmatched. China will also continue to turn to Vietnam for its alternative manufacturing capacity and two key advantages—relatively lower costs and culture. Culturally, onshoring in Vietnam is easier than in India or Indonesia, for example. In addition, Chinese businesses have woken up to the fact that they are unable to have their entire manufacturing capability in China; relying on solely domestic demand is a strategy that is increasingly less used. Among export markets, few countries offer what Vietnam can.

Our experienced portfolio managers have seen many headwinds in Vietnam in the past 15 years, including the COVID-19 pandemic, a banking system crisis and issues plaguing the corporate real estate sector. However, the portfolio managers believe that Vietnam will come out of this current uncertainty stronger. There have been success stories and, in their view, the direction of changes in corporate Vietnam is positive.

Market review: Second quarter 2025

EM equities rose in the second quarter of 2025. Geopolitical tensions were a mainstay during the quarter. Uncertainties persisted on the lack of concrete tariff deals between the United States and the rest of the world. The conflict between Israel and Iran escalated, this time involving the United States. For the quarter, the MSCI EM Index returned 12.20% while the MSCI World Index rose by 11.63%.3

The emerging Asia region rose, with all countries advancing. A framework agreement covering tariff rates between China and the United States has reduced some uncertainties, although the leaders of both countries still need to approve the agreement. One of our portfolio managers thinks that the range of tariffs—China at 30% and United Kingdom at 10%—is a deliberate mark by the United States, and tariffs for other countries should fall within this range. Indian equities benefitted from improved macroeconomic data, namely easing inflation and better-than-expected gross domestic product (GDP) growth for the January to March quarter.

The US tariff reprieve on semiconductors and the strong momentum of artificial intelligence (AI) infused the technology-reliant markets of South Korea and Taiwan, sending them higher on a more optimistic outlook. South Korean equities were supported by the election of its president, who promised market reforms and a revamp of the ‘Value-Up’ programme, providing potential for extended equity gains.

Equities in the emerging Europe, Middle East and Africa region rose despite geopolitical tensions. The conflict between Iran and Israel experienced a temporary ceasefire. The conflict’s lack of impact on oil production in the region and the involvement of the US military reduced negative sentiment. Volatile oil prices weighed on the Saudi Arabian equity market.

Equities in the emerging Latin America region gained. Strong earnings results from several Brazilian heavyweight companies, despite high interest rates, peppered headlines. Brazil’s central bank continued to increase interest rates during the quarter, but this did not dampen investor sentiment for Brazilian equities. This positivity was also evident in Mexico, where the central bank lowered benchmark interest rates. Its benchmark rate now hovers at its lowest level in nearly three years. The region is also seen as relatively insulated from tariffs and major geopolitical conflicts.

Endnotes

  1. “US Fund Flows: Investors Return in May After Rare April Outflows.” Morningstar.com. June 18, 2025.
  2. “Trump may name a ‘shadow’ Fed chair, an unprecedented development in American history.” Cnn.com. June 27, 2025.
  3. Source: MSCI. June 30, 2025. Past performance is not an indicator or a guarantee of future results. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.

 

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.

  1. 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.
  2. The MSCI Brazil Index is designed to measure the performance of the large- and mid-cap segments of the Brazilian market.
  3. 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).
  4. 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.
  5. The MSCI EM Latin America Index captures large- and mid-cap representation across five emerging markets (EM) countries in Latin America.
  6. 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.
  8. The MSCI India Index is designed to measure the performance of the large- and mid-cap segments of the Indian market.
  9. The MSCI Mexico Index is designed to measure the performance of the large- and mid-cap segments of the Mexican market.
  10. The MSCI South Korea Index is designed to measure the performance of the large- and mid-cap segments of the South Korean market.
  11. The MSCI Turkey Index is designed to measure the performance of the large- and mid-cap segments of the Turkish market.
  12. 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. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.

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