Three things we are thinking about today
India—weathering higher tariffs: The United States increased tariffs on imports from India to 50% on August 27, 2025. The MSCI India Index has declined a modest 5% from its second quarter peak, weathering the initial tariff storm. These tariffs will likely impact an estimated 55%–65% of India’s exports to the United States, mostly in the apparel, auto parts and chemical sectors. High-value exports, including electronics and pharmaceuticals, are currently exempt. Our base case remains that these tariffs could eventually be lowered. While negotiations have been delayed, many countries have been able to lower tariffs through negotiation with the United States.
͏China equities at a four-year high: The MSCI China Index has risen to a four-year high on optimism that US President Trump will likely agree to a US-China trade deal. Resilient corporate earnings among Chinese companies with a domestic focus has also buoyed sentiment. There is also recognition that while challenges remain, the lows the market reached in 2024 discounted an overly pessimistic outlook given the fiscal and monetary resources available to Chinese policymakers.
US Federal Reserve (Fed) set to cut interest rates: US Fed Chairman Jerome Powell signaled at the Jackson Hole Economic Policy Symposium last month that the cooling labor market trumps what may prove to be transitory inflation pressures. Fed funds futures declined following his speech and imply, as of September 1, an 80%–85% likelihood that the Fed will likely cut interest rates at its September 16-17 meeting. We believe this has positive implications for emerging markets (EMs) given a portion of corporate debt is denominated in US dollars.
Outlook
Our industrials sector analyst recently embarked on a machinery tour in China. In the wake of a longer timeline and prolonged uncertainty for US-China tariff negotiations, this trip created some insights into how companies are finding their footing in an uncertain environment.
Domestic sales: China for China
A leg of the tour was in Taicang, an industrial hub in China, where local government officials gave an overview of the city economy. The city hosts several industries, such as automotive spare parts, biomedicine and high-end equipment, among others. The area also benefits from a well-developed infrastructure designed to support emerging industries.
A visit to a major Chinese construction machinery manufacturer underscored the continued importance of the domestic market. Local demand is enjoying a continued recovery in construction machinery, and the profitability of domestic-oriented companies is expected to increase via a focus on large projects. In fact, several multinational companies have revealed that the Chinese operations are one of the most profitable.
Intercompany sales: China for global
As some companies scale back their exposure to the US market, a strategic shift toward expanding into other international markets is becoming increasingly evident. A Chinese heavy equipment manufacturing company is seeing strong demand in Asia and Africa—with gold mining driving the latter. The company is investing in a more robust global dealership and sales infrastructure to support this growth.
At another automotive parts supplier, the “China-for-global” strategy involves exporting domestically developed expertise and technology for integration into global product lines. The company conducts its research and development operations in China, leveraging lower energy costs and a comprehensive local supply chain.
In contrast, another industrial firm is pursuing a complementary strategy: leveraging its global network to assist Chinese clients in expanding internationally. This includes offering support on regulatory compliance and product strategy, thereby enhancing the value proposition for its Chinese customer base.
Underscoring our approach, amid times of uncertainty, is the bottom-up view of the investment landscape in EMs. We believe companies are evolving to cope with the changes in their operating environment, and there are still numerous companies with long-term earnings power in the investment universe.
Market review: August 2025
EM equities rose in August 2025. While trade focus shifts to sectoral tariffs, global equity markets rose on optimism of an interest-rate reduction by the US Fed. For the month, the MSCI EM Index returned 1.47%, while the MSCI World Index delivered 2.64%.
Equities in the emerging Asia region rose, with most country benchmark indexes showing gains. Several sectors in China were beneficiaries of government policies—share prices of food delivery companies rose as they pledged to cease price wars and curb excessive competition. However, these gains were reversed after price competition dented their quarterly results. Chinese semiconductor firms rose on the nation’s push to self-reliance. An extension of US tariffs on China into mid-November also drove optimism, and the rollout of interest subsidies for loans to boost consumption. Several large semiconductor names in Taiwan and South Korea benefited from an exemption of 100% import tariffs in the United States if they invest in the United States, although they came under pressure later as they tracked a technology selloff in the United States.
Indian equities traded against tariff headwinds, but easing inflation and plans to reduce goods and services taxes helped to pare some losses.
Equities in the emerging Europe, Middle East and Africa region rose, taking heed from global markets. Strong investor confidence, economic reforms and robust corporate earnings lifted stocks in Egypt. However, oil price volatility weighed on Kuwait and Saudi Arabia’s energy-heavy equity markets, dampening investor sentiment in those countries. Mixed corporate earnings results across sectors also led to mixed results in the region.
Equities in the emerging Latin America (LatAm) region recovered and advanced. Market-friendly political movements and structural reform expectations in the region bolstered investor confidence during the period. Brazilian equities shrugged off roadblocks in tariff negotiations with the United States. Brazil announced a plan to support exporters that the US tariffs have affected; the plan included a credit line. Mexico reduced its benchmark interest rate, reaching its lowest since mid-2022.
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 EMEA Index captures large- and mid-cap representation across 11 emerging markets (EM) countries in Europe, the Middle East and Africa (EMEA).
- 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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