Q2 2025 will be remembered as a quarter where volatility dominated the headlines—but emerging markets quietly delivered. Trade wars flared, missiles flew, central banks pivoted, and investors were left trying to separate noise from narrative. And yet, beneath the chaos, emerging markets showed remarkable strength, offering both solid returns and growing evidence of structural resilience.
The quarter began with a bang—President Trump’s dramatic “Liberation Day” tariffs shook global markets with the announcement of a 10% universal levy and reciprocal duties reaching up to 50%. Headlines screamed of deglobalization, and markets sold off in fear. But, as is often the case in geopolitics, reality moderated the rhetoric. By mid-May, a limited trade détente was reached with China, rare earth exports resumed, and market anxiety began to fade. The acronym “TACO”—Trump Always Chickens Out—quickly caught on as investors began to discount the more extreme tariff threats. The consensus by quarter-end was that the real effective rate would settle closer to 13%—still elevated, but far from apocalyptic.
Meanwhile, a dramatic escalation in the Middle East added another layer of tension. Israeli airstrikes on Iranian nuclear facilities in mid-June, followed by U.S. military action, sent oil prices briefly surging. But cooler heads prevailed. A ceasefire was agreed by the final week of June, removing the immediate threat of a broader conflict and allowing risk assets to stabilise into quarter-end.
Amid these political shocks, the global macro picture was more constructive than many had feared. U.S. growth slowed from its torrid Q1 pace, weighed down by higher rates and trade disruptions, but remained positive. Europe surprised to the upside, with improving PMI readings and a rebound in retail activity. China’s recovery, while fragile, showed signs of stabilisation by May. And across much of the emerging world, inflation trended lower, central banks gained breathing room, and growth held firm.
From a policy perspective, the tide turned dovish. The ECB delivered its first rate cut of the cycle in early June. The U.S. Federal Reserve held rates steady but signalled just one cut ahead—though markets, more sceptical of the Fed’s resolve, continued to price in at least two. Several EM central banks seized the opportunity to ease monetary conditions, supported by declining inflation and robust real rates.
Emerging market equities embraced the risk-on environment. The MSCI Emerging Markets Index rose 11.99% for the quarter in USD terms, modestly outperforming developed markets. Asia ex-Japan gained the same, driven by Southeast Asia’s solid growth and strong capital inflows. Brazil delivered a standout 13.3% return, buoyed by currency appreciation and improving macro fundamentals. India added 9.2%, continuing its run as a dependable growth engine. Even China eked out a 2% gain despite persistent concerns, as front-loaded exports cushioned the data.
Commodity and currency markets added fuel to the EM momentum. The U.S. dollar experienced its worst first-half start to a year since 1995, down roughly 7% in Q2 alone. This provided a tailwind for EM currencies and helped support broader sentiment.
Fund Performance & Attribution
The Milltrust Global Emerging Markets Fund delivered +14.8 % (net, USD) for the quarter, beating the MSCI EM index by nearly three percentage points. Outperformance came from a handful of decisive country and stock calls rather than a single macro bet—evidence, we believe, that disciplined bottom-up work still pays in volatile markets.
Where the alpha came from?
South Korea led the charge, contributing more than seven percentage points to fund return. A renaissance in heavy industry and defence spending lifted names such as Doosan Enerbility, HD Hyundai Electric and LIG Nex1. SK Hynix added further fire-power as global demand for high-bandwidth memory remained insatiable.
Taiwan chipped in another 3.6 %, almost entirely from the semiconductor complex. TSMC remained the anchor, but “second-derivative” suppliers—Elite Material (copper-clad laminates), Wiwynn (AI servers) and Asia Vital Components (thermal‐management solutions)—also shot higher as the market broadened beyond the mega-cap.
Brazil added 2.6 %, driven by a bounce in domestic consumption and logistics. Education provider Cogna Educação almost doubled off deeply depressed levels, while Localiza and MarcoPolo benefited from a rebound in car-rental demand and bus exports. Our small but timely position in convenience-store spin-off Sendas Distribuidora rounded out the gains.
India contributed roughly 1.2 %, with strength spread across auto, financials and healthcare. Mahindra & Mahindra captured the pivot to electric two-wheelers, while HDFC Bank and SBI Life proved that high-quality financials can still grow earnings in a rising-rate world. Narayana Health continued its quiet march to world-class clinical efficiency, delivering a near-30 % quarterly rally.
China was a modest net positive (≈1.7 %). A contrarian position in small-cap digital-media firm Newborn Town soared more than 60 %, offsetting weakness in selected consumer names and a sharp slide in online lender LexinFintech. We have further pruned lower-conviction Chinese cyclicals, retaining exposure only where valuations now embed worst-case sentiment.
Big picture:-
Sector lens – Industrials and Information Technology together delivered over half the quarter’s gain, validating our tilt toward “new-growth” and “energy-transition” enablers rather than old-economy commodity plays.
Currency lens – A soft US dollar added a small but welcome tail-wind, yet the bulk of the outperformance came from stock selection: allocation effects were broadly neutral.
Looking ahead, investors remain cautiously optimistic. Growth is expected to moderate into Q3, and the longer-term effects of tariffs may yet feed through to inflation and supply chains. But emerging markets enter the second half of 2025 from a position of relative strength. Real yields remain attractive. Valuations continue to offer a compelling discount to developed markets. And policy flexibility remains intact across much of the EM world—an increasingly valuable asset in today’s uncertain environment.
More importantly, the structural case for EM is strengthening. From reshored supply chains to rising digital penetration, from green infrastructure to demographic dividends, EMs are not just catching up—they are evolving in ways that are differentiated and investable. In a world of dispersion and divergence, that matters.
Q2 2025 was proof that emerging markets can not only weather the storm—they can thrive in its eye. We remain focused on uncovering the opportunities that volatility creates, and we thank you for your continued confidence in our approach.
