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Three things we are watching

Tariff rollback: 2026 could be the year where US President Trump rolls back his punitive tariffs to a baseline of 10%. Under pressure from elevated food prices, the United States has already announced cuts to tariffs on agricultural imports from Argentina and Brazil. Emerging markets (EMs) could be the primary beneficiaries of a broadening in this pivot in 2026, given they were among the countries hardest hit by tariffs in the Liberation Day announcement.

India/US trade deal by year-end: The United States is expected to announce the completion of its Framework Trade Deal with India by the end of December. This is expected to reduce the current 50% tariffs on India’s exports to the United States to 10%-15%. However, agreement on the more ambitious Bilateral Trade Agreement (BTA), which is expected to include a lowering of India’s tariff and non-tariff barriers for US agricultural exports, remains a challenge. Aside from reducing barriers to agricultural imports, the goal of the BTA is to increase US/India trade in goods and services from US$210 billion in 2024 to US$300 billion by 2030.1

Russia-Ukraine peace deal. Expectations of a peace deal between Russia and Ukraine have increased following the leak of the 28-point peace plan created by US negotiators. If a peace deal is successful, it could exert downward pressure on energy and agricultural commodity prices, given the importance of Russia and Ukraine exports of crude oil, gas, wheat and oil seeds. Lower commodity prices would be positive for inflation in developed markets, creating scope for additional interest-rate cuts in 2026. This could result in further US-dollar weakness, which would be positive for emerging markets.

Outlook

Chinese equities received a recent boost from the country’s anti-involution push, which aims to reduce price competition and industrial overcapacity. Manufacturing and high-technology sectors were focal points of this movement, which became formal and expanded during 2025. The investment team met with some strategic advisors to glean more insight into this reform.

A central objective of the anti-involution push is to generate additive innovation. In a hyper‑competitive environment, price wars and constant defensive spending erode profit margins across an industry, including for market leaders. By contrast, policymakers prefer a smaller number of financially stronger champions in each sector, rather than many weaker players, so that leading companies can reinvest their profits in innovation and research and development, reinforcing China’s broader industrial ecosystem.

Translating this objective into measurable outcomes is challenging because there is no formal metric system, but several indicators offer useful clues. Rising profitability among industry leaders is one sign, while broader margin improvement across entire supply chains is another. Greater international competitiveness would also signal progress: As Chinese firms move up the value chain, more “national champions” may emerge in advanced manufacturing, shifting from volume-driven growth toward higher-value, innovation-led offerings. For example, contract manufacturers could develop proprietary technologies and e-commerce platforms could expand into areas such as cloud computing.

There are also more ambiguous measures of success. Over time, improvements in overall well‑being, consumer confidence and even birth rates could suggest that the pressure of involution is easing and that the nation is sharing economic gains more sustainably.

The risk of a less successful anti-involution policy may have implications for investors worldwide. Continuous profit pressures and misallocation of capital may have negative implications, given China’s central role in many supply chains. However, China’s policies are greatly tied to national priorities. As investors in Chinese equities, our investment process has a top-down overlay to cater to the importance of policy direction in the country. Our China equity funds also favour leaders in their respective industries, as these companies also offer their own competitive advantages. We therefore believe that the anti-involution movement may provide a boost to well-managed companies with sustainable competitive advantages.

EMs are not homogenous, hence there will be different opportunities across the asset class. Our access to industry experts, company management and other sources of information provide us with the ability to balance optimism with risks.

Market review: November 2025

EM equities slid in November 2025. Pessimism over the odds of a US interest-rate reduction in December put a cap on performance. Concerns regarding stretched valuations in artificial intelligence (AI)-related stocks also pressured global indexes. For the month, the MSCI EM Index returned -2.38%, while the MSCI World Index delivered 0.31%.

The emerging Asia region declined, with most countries reporting losses. Technology stocks in South Korea and Taiwan took heed from global sentiment and weakened from concerns over equity valuations. Also in South Korea, the market regulator’s rare caution over the share price rally of a semiconductor company hurt equities. In China, rising geopolitical tensions, this time between China and Japan, had impact on the equity market.

However, Indian equities rose. Market sentiment was largely positive, with cooling local inflation, encouraging progress toward a US-India trade deal and lower oil prices. Corporate earnings were largely positive, which also helped to buoy Indian equities upward.

Equities in the emerging Europe, Middle East and Africa region also retreated, taking cues from global markets. Weaker oil prices dampened investor sentiment for Middle Eastern equities, with disappointing corporate earnings in Saudi Arabia adding to subdued equity performance. South African equities, however, bucked the regional trend and ended higher over stronger national growth prospects and an improving fiscal outlook.

Equities in the emerging Latin America (LatAm) region advanced as a whole. An upswing in Brazilian equities supported regional performance. Lower-than-expected inflation statistics for October 2025 paved hopes that an easing cycle may be on the cards soon. Annual inflation for Mexico also decelerated in October, and the Mexican central bank reduced its benchmark interest rate further. The rate now stands at 7.25%, the lowest level since May 2022.

Endnotes

  1. Source: US Trade Representative Office.
     

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. 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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