I continue to expect significant pressure on the USD and USD assets as a result of the trade wars and the broader trajectory of US policy.
I believe that global growth may inevitably shift towards Asia and Europe over the next few years as the US moves into recession.
After recently spending two weeks in China, I believe that cyclical reflation may occur with greater velocity in 2025.
We live in revolutionary times. Growth, wealth, and the ability to project power are all derivative benefits of the US dollar as the global reserve currency, which also carries with it the responsibility to benevolently govern the post-cold war international order. Rather, we are witnessing an abrupt — and chaotic — upending of the institutions and norms of that order. Unfortunately, trust is broken, and capital investments — particularly in the US — will likely be curtailed until there’s greater clarity on the endgame regarding taxes, tariffs, currencies, and geopolitics. Further, the most important bilateral relationship in the world between Washington and Beijing has perhaps never been as adverse.
Investors face some key questions:
There are no clear answers, but what is clear is that we are witnessing the start of a new regime globally. Is it one that extends the process of nationalism and further de-globalization of trade, talent, capital and ideas? Or will it be a much-needed shift away from what I believe are unsustainable global imbalances and a renaissance of prospective collaboration? My bet has to be on the latter, because the former would have severe impacts on the global economy.
We believe there’s a compelling case for considerable outperformance for international equities over the next few years. (It’s outlined in A brighter season for emerging market stocks may be ahead | Invesco US.) Ultimately the performance of emerging market (EM) equities — both absolute performance in United States dollar and relative performance to US equities — depends primarily on two factors: China and the US dollar. We contend that we may be at the inflection point where both align to be positive forces on USD returns. We believe that 2025 is the start of another structural bull market in EM equities.
The current administration’s policies, including trade wars and the abandonment of the international norms to which the world has become accustomed, have put significant pressure on the US dollar. The US’s reluctance to underwrite global commons — such as security, health, trade, and technology — will likely result in weaker global growth and greater proportional pain for the US. This shift is expected to lead to a sharp reversal in the feedback mechanism that previously supported US growth and equity market gains.
The US dollar has long been the world’s reserve currency, providing stability and liquidity to global markets. However, recent policy decisions have undermined trust in the US’s commitment to maintaining this role. Tariffs and trade wars have disrupted global supply chains, leading to increased costs and uncertainty for businesses. Additionally, the US’s withdrawal from international agreements and institutions has created a perception of unpredictability and isolationism.
As a result, investors are increasingly looking for alternatives to the US dollar. Currencies of countries with stable economic policies and strong growth prospects, such as the euro and the Chinese yuan, are becoming more attractive. This shift away from the US dollar will have significant implications for global trade and investment flows, potentially leading to a rebalancing of economic power.
Beyond USD weakness, I also believe that global growth may inevitably shift towards Asia and Europe over the next few years as the US moves into recession. I believe both geographies have considerable fiscal policy latitude to reflate (insufficient) domestic demand given the shock of weaker exports. This will likely require supporting private investment with deregulation and tax cuts, and domestic consumption with fiscal policy supports.
The deflationary consequences of this export shock may also give the European Central Bank (ECB) and Asian central banks wide latitude to support growth. In contrast, I expect the United States will experience uniquely inflationary conditions as a result of a self-imposed supply-shock from tariffs. I would also note that the retreat in commodity prices (particularly energy) is expected to be extremely positive to Europe and Asia, which are the largest global importers.
Asia and Europe are well-positioned to take advantage of this shift in economic power. Both regions have strong industrial bases, advanced technological capabilities, and favorable demographic trends. Governments in these regions are also more willing to implement policies that support growth, such as infrastructure investments, tax incentives, and regulatory reforms.
In Asia, countries like China, India, and Southeast Asian nations are experiencing rapid economic growth driven by rising middle-class populations and increased domestic consumption. These countries are also investing heavily in technology and innovation, positioning themselves as leaders in industries such as biotechnology, renewable energy, and digital services.
Europe, despite its challenges, remains a major economic powerhouse. The European Union’s commitment to economic integration and cooperation provides a stable environment for businesses and investors. Additionally, European countries are implementing policies to stimulate growth, such as fiscal stimulus packages and structural reforms. The combination of these factors makes Asia and Europe attractive destinations for investment and economic growth.
In conclusion, the weaker dollar, relatively stronger international economic growth vs. US could lead to equity migration from over-owned US stocks into international/EM bourses.
China is the bedrock for all emerging market mandates, representing 31% of the MSCI EM Index.1 The country's economy is larger than the collective economies of India, Latin America, and Southeast Asia.
The case for Chinese equities hinges on a cyclical recovery in domestic demand and a structural shift away from excess savings towards domestic consumption. This shift will likely be driven by policy reflation and a significant restructuring of the domestic economy.
Chinese equities remain undervalued and under-owned, presenting what we believe to be a compelling investment opportunity as domestic savings are redirected into higher-yielding assets.
China’s economic transformation over the past few decades has been nothing short of remarkable. The country has transitioned from an agrarian economy to a global industrial powerhouse, lifting hundreds of millions of people out of poverty in the process. However, this growth has been largely driven by investment and exports, leading to imbalances such as excess savings and overcapacity in certain sectors.
To sustain long-term growth, I believe China needs to shift its economic model towards domestic consumption. This may require significant policy reforms, including improving health care and pension systems, reducing income inequality, and encouraging consumer spending. The Chinese government has already taken steps in this direction, implementing measures to boost domestic demand and reduce reliance on exports. And having spent the past two weeks there, we believe this transition may occur with greater velocity in 2025.
The trade wars have accelerated this shift, as external pressures force policymakers to focus on domestic economic stability. The Chinese government is likely to continue implementing policies that support domestic consumption, such as tax cuts, subsidies, and infrastructure investments. These measures will likely create a more balanced and sustainable growth model, potentially benefiting Chinese equities in the process.
Chinese equities are also poised to benefit from increased liquidity. With about USD 41 trillion in bank assets sitting in nearly zero-yielding2 “risk free” bank deposits, there’s potential for liquidity to be redirected into higher yielding/higher growth equities. We believe that China houses some of the most innovative companies on earth. This influx of capital may support the growth of these companies in sectors such as biotechnology, internet services, consumer discretionary, and new energy technologies.
Furthermore, Chinese equities remain undervalued compared to their global counterparts3. Despite the country’s economic growth and technological advancements, international investors have been cautious due to geopolitical risks and regulatory uncertainties. However, as China continues to implement reforms and improve market access, these concerns are likely to diminish, making Chinese equities an attractive investment opportunity. We believe that China houses some of the most innovative companies globally. These include biotech, internet service giants, consumer discretionary businesses and new energy technologies.
In conclusion, the case for China is strong. The country’s economic transformation, policy reforms, and increased liquidity create a favorable environment for investment. As China shifts towards a more balanced and sustainable growth model, Chinese equities may be poised to meaningfully outperform for investors. And we also believe that the Invesco Developing Markets fund is well-positioned for both a structural revaluation of Chinese equities and a weaker USD environment.
Source: MSCI as of 03/31/2025
Source: CEIC Data as of December 31, 2025
Source: MSCI. MSCI China index represents broad performance of Chinese Equities. MSCI China Index is trading at 13x trailing P/E multiple compared to 15x P/E multiple for broad EM equities, as represented by MSCI EM Index. MSCI World index, representing global equity, is trading at 21x P/E multiple and S&P 500 index, representing US equities, is trading at 23.5x P/E multiple.
Important Information
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Photographer Credit: Wang Yukun / Getty
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Reflation refers to a monetary policy intended to curb the effects of deflation.
The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 Emerging Markets (EM) countries. With 1,198 constituents, the index covers approximately 85% of the free-float-adjusted market capitalization in each country.
A price-to-earnings (P/E) multiple, also known as a price-to-earnings ratio or earnings multiple, is a valuation ratio that compares a company's stock price to its earnings.
The MSCI Emerging Markets ex China Index captures large and mid cap representation across 23 of the 24 Emerging Markets (EM) countries* excluding China. With 665 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips, and foreign listings (e.g., ADRs).
The MSCI World Index is an unmanaged index considered representative of stocks of developed countries.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile. The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Investments focused in a particular sector, such as financials, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments
Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers.
Investing in securities of Chinese companies involves additional risks, including, but not limited to: the economy of China differs, often unfavorably, from the U.S. economy in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, allocation of resources and capital reinvestment, among others; the central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership; and actions of the Chinese central and local government authorities continue to have a substantial effect on economic conditions in China.
The investment techniques and risk analysis used by the portfolio managers may not produce the desired results.
The opinions referenced above are those of the author as of April 23, 2025. These comments should not be construed as recommendations but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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