LONDON (Reuters) -Emerging markets are basking in the glow of their surprise rally this year, but major investors warn things may get tougher as countries finally learn their U.S. tariff fates and the dollar snaps out of its slump.

U.S. President Donald Trump's return with a re-energised Make America Great Again mantra had economists fearing the worst for developing economies. But, much like his first term, it has so far done the opposite.

MSCI's 47-country emerging market stocks index is up 17%, twice as much as the S&P 500. Most major EM currencies have seen double-digit gains and the IMF has just revised up its growth forecasts.

Analysts say the dollar's 10% January-to-June dive has played a key role - as it did when it dropped 8% during the first six months of Trump's first term and emerging stocks rallied nearly 25%.

But July will be the greenback's first monthly rise of the year and the 'Magnificent Seven' big tech stocks that have sucked money out of EM - and everything else - are now up almost twice as much as the EM index since Trump's "Liberation Day" tariff announcement on April 2.

"It is almost as if we are watching the same movie as 2017," David Lubin, a former head of emerging market economics at investment bank Citi now at the Chatham House think tank, said referring to Trump's first term in charge.

"The first year is a weak dollar environment, which is the kind of macro backdrop that suits emerging markets," Lubin said, explaining that only after that did things turn difficult.

This year has seen 25% jumps in Chinese stocks and local Brazilian bonds, a 40% leap in Ghana's currency, and just this week the premium, or 'spread', investors demand to buy EM corporate debt has hit its lowest since the 2008 global crisis.

With multi-trillion dollar money managers like BlackRock, PIMCO and sovereign wealth funds all now upbeat, analysts at Bank of America believe buying EM is now such a "consensus" trade that it is almost a worry.

They say it is likely to get even more entrenched if the dollar falls back another 2.5%-3%, although with Friday's tariffs deadline looming for India, Brazil and others - China's truce has been extended again - the main risk to the bulls is growth.

LASTING TURNAROUND?

All in all it is a pivotal juncture for EM, which hopes to reverse its long-waning appeal.

COVID, conflicts and rising global interest rates mean dedicated emerging market bond funds have attracted zero inflows over the last six years, and as far back as 2013 in the case of local currency funds, JPMorgan's head of EM fixed income strategy, Jonny Goulden, estimates.

A study by the bank this week showed that while foreign direct investment into EMs recovered briefly post-COVID, since 2022 it has declined unabated.

Equity investors have had it even worse. MSCI's EM share index is up just 15% since the 2007-2008 financial crash, whereas big all-world indexes and Nasdaq are up over 150% and 700% respectively.

Yerlan Syzdykov, the head of emerging markets at Europe's biggest fund manager Amundi, says a number of major pension funds and sovereign funds are now mandating EM money managers as they look to diversify from the U.S a bit.

He remains upbeat on Brazil and Mexico, where interest rates are coming down and the likes of Egypt, Turkey and Pakistan, which are still overcoming difficulties, whereas the Gulf region could be a "reversal trade" if oil prices start dropping again.

Founder and CIO of EM-focused Gramercy, Robert Koenigsberger, sees "a tremendous amount of FOMO (fear of missing out)" around EM at the moment. But he too wants to see the final tariff lists, given that Brazil has been threatened with a 50% rate.

Veteran equity investor Mark Mobius says high tariffs will make it "more difficult, if not impossible" for countries to pursue export-led development models, although young populations can pick up slack and new technologies provide vast opportunities.

JPMorgan meanwhile is sticking with its call to remain cautious on EM debt. Its economists see the average effective U.S. tariff rate rising 18-20% compared to 2-3% at the start of the year and still see a 40% chance of a U.S. recession.

U.S. downturns tend to cause global selloffs that drive EM sovereign debt 'spreads' 125-200 basis points wider. That might not follow this time if U.S. bond markets also sell off, but if it did, it would undo all the improvement since mid-2023.

"EM assets and most other financial markets have a well-defined playbook around a recession," Goulden said. "And it's not a positive one."