Emerging markets, caught between economic giants, face tough 2025, JPMorgan says

By Libby George

LONDON (Reuters) - Emerging markets are in for a tough and uncertain year due to policy shifts in the United States and uncertain growth in China, JPMorgan said in its annual outlook, predicting emerging markets bond funds were in line for sizeable outflows.

"EM growth faces significant uncertainty in 2025, caught between two giants - China and the U.S. – with policy changes in the latter potentially delivering a large negative supply shock that will have spillovers across EM," JPMorgan said on Tuesday.

The bank said its base case sees growth across developing nations slowing to 3.4% in 2025 from 4.1% this year. Looking at emerging markets ex-China, JPMorgan predicted growth to moderate to 3.0% from 3.4%.

Emerging-market fixed income was set to be at the sharp end of the stick, with Donald Trump's return to the White House and a Republican Congress posing "challenging headwinds" due to tariff policy, geopolitical shifts and domestic U.S. policy leading to a stronger dollar as well as higher rates.

The Wall Street bank predicted emerging market dedicated bond funds were set to suffer outflows of between $5 billion and $15 billion next year.

"U.S. policy’s impact on sentiment to EM is likely to be the main drag, with the lagged impact of Fed easing providing some offset," JPMorgan analysts wrote.

On debt sales, JPMorgan forecast $169 billion of hard-currency sovereign gross issuance in 2025, a touch below 2024. However, rising amortisations meant net financing would stand at $1.3 billion, a fraction of this year's $55.2 billion.

The bank said it expected hard-currency sovereign debt to return 4.3% by year-end 2025 compared to returns of 6.9% year-to-date 2024.

"What lies ahead for EM in 2025 looks likely to be choppier waters, albeit hitting an already battle-hardened asset class," JPMorgan said.

In terms of specific market calls, the bank removed its overweight call on sovereign debt from the Dominican Republic, even if it expects the country to attain investment-grade status over the next four years. It also turned underweight in Indonesia local rates.

(Reporting By Libby George, editing by Karin Strohecker and Rod Nickel)