With Donald Trump returning to the White House and a Republican-led Congress on the horizon, emerging markets are bracing for significant policy shifts.
Thys Louw, emerging market fixed income portfolio manager at Ninety One, noted that the initial market reaction indicates a “reflationary/risk-on tone” in US assets, with rising treasury yields, stronger equity futures, and a robust dollar. Louw added: “Currencies such as the euro and Mexican peso have been the main underperformers, as they are likely to find themselves in the crosshairs of trade policy.”
In emerging markets, the reaction has been more complex. While the stronger dollar and higher US yields typically weigh on emerging markets, the impact has not been uniformly negative. “High-yield credit markets have largely performed well,” Louw observed, citing strong performance in markets like Ukraine’s sovereign debt, buoyed by expectations of potential peace negotiations under Trump’s leadership. Louw highlighted key upcoming events that could shape the short-term outlook, including China’s National People’s Congress meeting, the US Federal Reserve’s November meeting, and a 30-year US Treasury auction, which will “anchor longer-dated Treasury rates.”
Geopolitical tensions push investors to eye emerging markets
Stefan Eppenberger, chief investment strategist at Vontobel, commented on the market’s anticipated response to Trump’s victory, which he says has been “broadly positive but with less volatility than in 2016.” US stock futures have risen 1.8%, with the 10-year US Treasury yield now above 4.4%, strengthening the dollar by around 1%. While the dollar rallies, oil prices have dipped slightly, and cryptocurrencies like Bitcoin have seen gains, highlighting varied investor sentiment across asset classes.
On the broader economic outlook, Eppenberger suggested that Trump’s policies will stimulate growth through fiscal expansion and deregulation, benefiting energy and financial stocks but risking higher interest rates. “Amid high economic uncertainties, we remain neutrally positioned on equities, with an overweight in gold and an underweight in bonds,” he says, favouring emerging market bonds over high-yield alternatives.
Trump’s trade policies may increase event risk for China, cautioned DWS Global CIO Björn Jesch, impacting emerging markets. “Countries like Mexico, which benefitted from near-shoring, will find their position weakened,” he explains, adding that Chinese fiscal stimulus could shift sentiment if enacted,” said Jesch.
Ben Lofthouse, portfolio manager of Henderson International Income Trust, noted that if Trump pushes for increased US oil production and manages to help end the Ukraine conflict, this could boost supply in several commodities—fertilizers, wood, oil, and gas—benefiting many economies in the long term. “The market is not talking about this because these would be longer-term effects,” he said, adding that the impact on China remains uncertain until more details on its stimulus plans emerge on Friday.
Rob Brewis, Investment Manager at Aubrey Capital Management said he expects US-India relations to stay positive, especially as India serves as a regional counterweight to China. Additionally, in Latin America, Mexico appears vulnerable to Trump’s policies, as he may view nearshoring there as a loophole for Chinese firms to bypass US tariffs.
“Regardless of the U.S. election result, the core themes driving emerging markets – urbanisation, rising consumption and a growing, aspirational population – remain true. We believe that active stock picking based on a fundamental bottom-up approach, with an awareness of macro factors, is the best way for investors to explore opportunities within these markets,” added Brewis.
