Many experts are now asking whether a decline in US risk appetite could provide a lift to emerging markets. It is a complex question, but analysts at Citi are offering some clarity. Despite ongoing challenges posed by global trade uncertainty and weaker export dynamics, they believe that US de-risking could unlock new opportunities for emerging economies.
In its latest outlook on emerging markets, Citi noted that although the "shift from tariff 'Liberation Day' to 'Tariff De-Escalation' sparked [a] risk rally," the underlying challenges remain unresolved.
Citi warns that prolonged uncertainty will continue to weigh on trade-related capital expenditures. The bank also points to unresolved threats stemming from US tariffs.
Analysts highlight growing US policy volatility and a growing investor desire to reduce exposure to "US economic coercion." In such an environment, the traditional safe-haven appeal of US Treasuries begins to erode. Citi also underlines a gradual "erosion of USD dominance" due to President Donald Trump’s tariff strategy and broader geopolitical tensions.
At the same time, a weaker dollar could benefit emerging market assets. However, the firm warns that "outsized FX appreciation pressures, fueled by repatriation/USD-de-risking flows," could be unwelcome for these economies.
The bank adds that the outperformance of emerging market bonds compared to US Treasuries on a Sharpe ratio basis, especially those in Brazil, South Africa, and Peru, suggests that they could be "good candidates for USD and UST diversification flows."
