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US President Donald Trump has continued with his tariff threats, announcing a 50% tariff on all Brazilian imports as part of a new round of letters to trading partners, and that the 50% tariff on copper will go into effect on 1 August. Brazil was not on the initial list of trading partners when Trump announced the “reciprocal” tariffs on “Liberation Day” in April, as the US runs a goods trade surplus with Brazil.

In his letter to President Luiz Inácio Lula da Silva, Trump justified the decision on both trade and non-economic grounds, claiming that Brazil’s ongoing trial against former President Jair Bolsonaro “should not be taking place.” Lula responded to the letter, saying that “any unilateral move to raise tariffs will be met in accordance with Brazil’s Economic Reciprocity Law.”

It is not clear on what grounds the US administration would implement this tariff. We think it would be hard to justify the use of the International Emergency Economic Powers Act (IEEPA) given the trade surplus with Brazil. Sections 232 and 301 of the Trade Expansion Act of 1962 are available to the US president, but they would require an initial investigation and would have to be based on a trade-related grievance. Given the possible legal hurdles, we think the 50% threatened tariff on Brazil is unlikely to become permanent.

We reiterate our Attractive view on Brazil stocks, and believe that emerging market equities overall should continue to see solid performance amid a supportive macro backdrop.

The economic impact on Brazil would be modest, in our view. Brazil is a relatively closed economy, with exports and imports accounting for just 28% of its GDP in 2024. Its largest trading partner is China, and only 16% of the country’s total exports go to the US, representing less than 2% of its GDP. While the 50% tariff would have a greater impact on certain products like semi-manufactured iron and steel, aircraft, construction materials, ethanol, and wood and related products, we think the overall economic impact on the Brazilian economy is manageable. We therefore expect the direct impact on corporate earnings to be contained.

US dollar weakness is likely to persist, providing a tailwind for EM equities. The DXY index has fallen over 10% this year, and we believe the dollar weakness will persist in the months to come. While minutes from the Federal Reserve’s June meeting showed only narrow support for a near-term reduction in interest rates, “most participants” anticipated rate cuts would be appropriate later this year. We expect 100 basis points of easing over the next 12 months, while the elevated fiscal deficit should also weigh on the greenback. A weaker US dollar has historically been supportive of emerging market equities as it encourages capital inflows and eases corporate debt burdens. It also clears the way for more monetary policy easing in emerging markets, which should help stimulate economic activity locally, encouraging investment and spending.

Emerging markets will likely remain key beneficiaries of the global push for portfolio diversification. As investors seek to broaden their sources of return, emerging markets offer access to unique macro and policy cycles, structural growth opportunities, and diversification benefits—especially amid rising geopolitical fragmentation and shifting supply chains. Emerging market equities remain under-owned and have only recently begun to attract inflows, which could support a more constructive medium-term outlook for the asset class.

So, while we continue to highlight near-term volatility, we see decent mid-single-digit upside for emerging market equities over the next 12 months and maintain our Neutral rating. We recommend a selective approach, favoring secular growth stories in Taiwan and India. We also like mainland China's tech sector due to its resilient earnings and monetization potential, as well as Brazil given attractive valuations and solid economic growth.

Read more in CIO's Blog: President Trump threatens Brazil with 50% tariff.