An Unlikely Rally in an Unforgiving World

By Dalton Gardimam, Chief Economist, Ágora Investimentos Why emerging markets and Latin America led 2025 equity performance, and what to expect going forward The strong performance of Latin America and emerging markets in general in 2025 is surprising. The global economy remains constrained by (relatively) high real interest rates, geopolitical challenges (old and new) requiring a new approach to everything and higher US tariffs across the board creating additional problems. All these would suggest weaker, not stronger, emerging‑market assets, which are traditionally more vulnerable to external shocks. But not so: the MSCI Emerging Markets Index delivered 30.6 percent in 2025, compared to only 19.4 percent for the MSCI Developed World Index. Latin America MSCI was even better: 46.2 percent. In fact, this is the second time in a decade that emerging markets outperformed developed markets. At first glance, this outcome appears paradoxical. Economic growth in Latin America remained modest (Brazil likely delivered gross domestic product [GDP] growth slightly above 2 percent, while Mexico posted growth a bit below 1 percent). Political uncertainty persisted, and the region remained far from the world’s main centers of technological innovation—an attribute made clearer by the challenges and opportunities in the field of artificial intelligence (AI). Again, among the top equity performers last year were Brazil at 39.9 percent and Mexico at 49.6 percent. How do we explain the interest in emerging‑market assets in a world in which globalization, as traditionally understood, no longer provides automatic tailwinds? This performance was not a speculative boom driven by optimism about rapid growth or technological catch‑up. How do we explain the interest in emerging‑market assets in a world in which globalization, as traditionally understood, no longer provides automatic tailwinds? The simple model of more globalization meaning more exports and more dollars and, consequently, better domestic conditions is less direct or simply no longer what it used to be. For much of the past three decades, emerging‑market success was closely tied to globalization, particularly the impact of China’s integration into the global economy (China entered the World Trade Organization [WTO] in 2001). Trade integration, expanding cross‑border value chains and abundant global liquidity allowed many countries to grow faster than advanced economies. No country benefited more from this model than China, but indirectly, Southeast Asia and Latin America were also net gainers (e.g., Brazil’s performance during the so‑called super-commodity boom). That model began to erode after the Global Financial Crisis (GFC) of 2008, was severely tested during the pandemic and recently entered a new phase with the intensification of geopolitical tensions. Latin America entered this new global environment with a long history of underperformance. Throughout the 2010s, the region struggled with weak growth, political volatility and repeated disappointments with structural reforms. As a result, its equity markets began the 2020s trading at deeply discounted valuations relative to both developed markets and other emerging economies. Unlike markets that entered this complicated new environment with elevated valuations and optimistic growth assumptions, Latin American equities had already undergone years of de‑rating. The rally of 2025 was, therefore, less an expression of exuberance than a repricing of pessimism. Investors did not suddenly become bullish on long‑term growth prospects; they adjusted expectations that had become excessively negative. Somehow, higher US rates were not especially harmful to the region. Maybe it is worth considering a thesis to be investigated in the years to come: The route to less globalization hits first and hardest those already more globalized and more integrated with the global economy, conditions that have not been seen in Latin America. But two important aspects must be considered to understand the performance of some of these emerging markets. The first set we will call “traditional assets”—companies with tangible assets (less tech‑oriented, with presumably more tangible assets on their balance sheets), higher current cashflows (helped by high commodity prices) and relatively conservative balance sheets (here a blessing in disguise, since some weaker fiscal positions drove higher interest rates and consequently a conservative corporate stance). Commodity producers and banks are the natural picks for this concept. The other is an idea that we will call “geopolitics of commodity supply” (including rare earths). The question here is simple: In this block‑fragmented world (China, United States, Europe in the middle, etc.), would the supply and control of commodities and rare earths be an economic advantage, giving specific regions the status the Middle East had between the 1970s and the mid‑2010s (prior to the rise of shale production in the US)? In World Population Review’s “Rare-Earth Reserves by Country 2026,” Brazil stands in second place in the ranking of largest reserves. Are rare earths the new oil? These supply considerations will be even more important going forward. Should investors have priced this in already? The post‑2020 global economy is not undergoing pure deglobalization, but rather a transformation marked by greater fragmentation. The post‑Trump‑II world is subject to new, unknown challenges with implications that are yet to be understood. Commodity trading will become more complex than buying and selling a commodity in an atomized market, with geopolitical alignment and national‑security considerations playing some role. The first attempt at that was China’s October 2025 ban on rare‑earth exports to the US (later partially revoked). If efficiency is no longer the sole organizing principle of global production, this will have profound consequences over time. These new geopolitical considerations align with all the announced and practiced reshoring, near‑shoring and friend‑shoring initiatives we are seeing worldwide. Mexico offers the clearest example. As US firms sought to reduce geopolitical and logistical risks, nearshoring emerged as a central feature of North American industrial strategy. Mexico’s proximity, existing trade agreements and manufacturing base positioned it as a natural beneficiary. The result was stronger investment flows, more stable export growth and tangible improvements in corporate earnings. The 2025 US tariffs have complicated this process, but it is hard to see any outcome other than the continuation of this rearrangement in the coming years. Brazil followed a different path. Its performance did not rely on manufacturing exports or rapid integration into new supply chains. Instead, it reflected the strength of domestic sectors: high‑productivity agribusiness, energy and mining in a context of structural scarcity, a resilient services sector and a well‑capitalized financial system. Growth was moderate, but profitability was strong. Depressed valuations in 2024 and an undervalued currency at the beginning of the year explain the remaining elements of the solid equity performance last year. We might add another consideration to the analysis of investment decisions going forward from a geopolitical perspective. It is the “geopolitics of bloc formation.” Despite the rising global trend toward geopolitical fragmentation, Latin America remains relatively less exposed to the risks associated with bloc‑based confrontation. One reason is the region’s historically low degree of trade integration into any single geopolitical bloc, which reduces its vulnerability should the world divide into competing spheres of influence. According to the International Monetary Fund (IMF), Latin America and the Caribbean are “well placed to withstand a mild trade fragmentation scenario,” precisely because their trade patterns are highly diversified and not deeply tied to any one bloc. In addition, Latin America maintains balanced relations with major powers, including the United States, China and the European Union (EU), rather than aligning firmly with any side. This diversified external engagement means the region tends to act as a geopolitical buffer, lowering the probability that it will become a frontline arena of strategic competition. So far, the region has not been “obliged” to take sides (i.e., aligning with China or the US on a mutually exclusive basis). Furthermore, Latin America’s lack of interstate armed conflict reduces the likelihood that it will become a hotspot in global rivalries, even as major‑power competition increases globally. Emerging‑market equities delivered a strong performance in 2025, and several structural and cyclical factors suggest this momentum is likely to extend through 2026. The 2025 rally was driven by robust earnings, dollar weakness and policy easing in key economies alongside a combination of forces related to the many geopolitical changes underway, as we discussed above. Demographics, rising domestic consumption and, more importantly, the lack of evidence that the US dollar will post a countertrend rally will continue to help emerging markets, particularly Latin America. 2026 risks include a more pronounced deceleration of the US economy, a halt to monetary easing amid increased political noise between the Federal Reserve (the Fed) and the US president, and risks associated with US equity markets amid the extraordinary AI‑related investment cycle. It is difficult to envisage a strengthening of the US dollar (U.S. Dollar Index, or DXY); for sure, this would alter the favorable trend in domestic currencies in the EM space.