August 2025*
US trade policy is expected to stay hawkish under the Trump presidency. However, lower trade linkages and stronger fundamentals leave frontier markets (FM) in a better position to absorb higher tariff rates. Easier Fed policy and a softer US dollar suggest a more supportive backdrop for FM too. Within the FM universe, our allocations reflect our positive view on structural drivers such as friend-shoring (Vietnam) and decarbonisation (Kazakhstan).
Frontier markets equities have remained resilient amid uncertain and volatile US trade policy. Reciprocal US tariffs, introduced on April 2nd (“Liberation Day”), were paused at a rate of 10% for 90 days to allow for trade negotiations. The updated tariff rates announced on the eve of August 1st are generally in line with or lower than those introduced on April 2nd, seemingly avoiding the worst-case scenario for global growth (see Chart 1). Among FM, only Vietnam and Pakistan have reached a trade deal with the US, and there appears to be scope for further countries to negotiate. However, elevated US tariff rates are set to be a mainstay of the Trump administration, with the Budget Lab at Yale estimating an average effective tariff rate of approximately 18% in 2025, the highest since 1933. Meanwhile, sectoral tariffs are less likely to be negotiated away as they are viewed by the US as a national security tool. As such, the global economy is projected to slow in H2 as tariff front-loading fades and higher tariff rates weigh on activity.
There are several factors that should support FM. Apart from Vietnam, FM tend to have more domestically oriented economies and weaker trade linkages with the US. Overall, FM fundamentals have also improved, with countries building foreign reserves and undertaking structural reforms – particularly under IMF programmes. The softening of the US dollar this year has also meant that most currencies have held up well (see Chart 2). In some markets, such as Pakistan, subdued inflation means that the central bank has the policy space to support the economy.
We maintain a bearish dollar view as cyclical and structural factors come into play. Rate and growth differentials do not favour the US dollar, with the Fed expected to resume its easing cycle at the September FOMC meeting. Concerns over US fiscal health and the Trump administration’s push to narrow the trade deficit suggest capital may be diverted away from US assets. FM equities tend to outperform developed market (DM) during periods of dollar weakness (see Chart 3).
Vietnam’s trade deal with the US, agreed in early July, was widely seen as a template for what other trade dependent countries could negotiate. The agreed 20% tariff rate is higher than before but much lower than the 46% threatened on Liberation Day. Notably, Vietnam’s trade deal also stipulates a 40% tariff rate on transhipment goods, underscoring the Trump administration’s efforts to clamp down on transhipment from China. While at first glance this deal may seem to jeopardise the China Plus One strategy that has driven growth over the past few years in Vietnam, the rate is still lower than China’s (which is expected to be 40-50%). The trade deal in turn may spur more supply chain diversification away from China, especially if goods now need to meet more stringent rules of origin requirements. However, the US has not provided a definition of these rules or clarified how this rule will be enforced. Beyond the trade agreement, Vietnam continues to present long-term value. The government is making a concerted effort to boost the private sector and support a growing middle class. The country still has a competitive and educated labour force, an attractive geopolitical position, and stable politics. It is also worth noting that Vietnam and the US are strategic partners.
| Chg | -2 | -1 | 0 | +1 | +2 | |
|---|---|---|---|---|---|---|
| Argentina | ↑ | |||||
| Vietnam | – | |||||
| Morocco | – | |||||
| Iceland | – | |||||
| Romania | – | |||||
| Kazakhstan | – | |||||
| Oman | – | |||||
| Georgia | – | |||||
| Pakistan | – |
Note: Up/down arrows indicate a positive/negative change in our asset allocation compared to the previous outlook. A dash indicates no change. The table shows the major Frontier Markets.
Source: CLIM
*The publication reflects asset performance up to 31 July, 2025, and macro events and data releases up to 8 August, 2025, unless indicated otherwise.
The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.