Emerging markets: Battening down as Trump squall looms?

As economic headwinds gather due to his promised Americas-first policies, a look at the potential impact Trump 2.0 may have on emerging markets.

AUTHOR Robert Gilhooly Senior Emerging Markets Research Economist

President-elect Donald Trump and the Republican Party’s return to power will lead to major policy changes at home and abroad. 

Emerging markets (EMs), particularly those vulnerable to US monetary policy, the strength of the US dollar, and international capital flows, must brace themselves for the implications of new and often unorthodox US leadership.

The precise details of this new era of US policy remain unclear. Much will depend on the team Trump picks to pursue his America-first agenda. Much will also depend on whether Trump’s threats are real or just a negotiating tactic to extract concessions. 

Many analyses repeat three common features: the re-emergence of US inflation, a federal funds rate stuck at higher levels, and the return of confrontational trade policies.

This may be bad news for many EMs, where central banks will be constrained in how much they can cut interest rates, and for governments accused of unfair trade practices. This, in turn, could prove a headwind to EM asset prices. While bouts of political and market pressure may be hard to avoid, a wide range of winners and losers will be revealed over time – yet another reflection of the diversity within EMs. 

My currency, your problem

Trump’s pro-growth and market-friendly policies, such as lower taxes and the push for deregulation, will likely lead to higher inflation and interest rates. This will restrict the ability of EM central banks to reduce their interest rates since higher rates reduce capital flows and put downward pressure on EM currencies. 
Countries like Mexico and Indonesia, sensitive to the US Federal Reserve’s (Fed) decisions and dollar strength, may face greater pressure. EM nations with significant fiscal concerns, such as Brazil, might also find it challenging to navigate this new landscape.

Trading places

While Trump’s trade policy promises, meaning tariffs, create a complex and less predictable environment for EMs, a pro-business administration still has the potential to benefit many EMs through a stronger global economy and positive market sentiment. 

However, extensive trade conflicts, particularly with China, but also with other major trading partners and traditional allies open a wide range of outcomes. Mexico, which is deeply economically linked with the US, is particularly vulnerable but may be the biggest beneficiary if the US prioritizes diversifying away from China. For example, the review of the US-Mexico-Canada Agreement in 2026 is a critical test of regional trade relations. There are indications that Trump will threaten tariffs to stem illegal immigration into the US across its borders rather than to reduce imports of goods. 

EMs, like Mexico, Vietnam, Korea, and Taiwan, with large trade surpluses, or those accused of re-exporting Chinese goods, like Vietnam and Malaysia, may face market pressures. Countries with high tariffs on US goods, like Brazil and India, will also be affected. 

Chinese whispers

Trump’s first term in government led to restrictions on trade with China (which President Joe Biden’s administration kept). He has since threatened to increase tariffs on Chinese goods to a staggering 60% or more. We’ll have to wait and see whether he was being serious.

A second trade war would force China, the world’s second-largest economy, to do more than it has so far to support its stuttering growth. This should prevent much of the shock from spreading to other EMs.

In time, many EMs will benefit as multinational companies reconfigure their global supply chains to protect themselves from geopolitical tensions. India and Mexico appear well placed as factories move to less risky alternatives in other countries. 

Drill baby, drill

Trump’s stance on sustainability adds another layer of complexity for EMs. He has promised to withdraw (once again) from the Paris Agreement and threatened to dismantle Biden’s Inflation Reduction Act (IRA) as part of his vision of a revitalized US with booming energy production, especially coal and oil.

While the US may choose not to be a sustainability leader, the rest of the world will push ahead with sustainability initiatives, regardless of whether the US is involved. EMs will be hurt if the US doesn’t contribute to financial commitments to poorer countries in support of their energy transition and if its policy pivot adds to climate-related damage.  

What might investors think?

It’s hard to make a single statement about whether Trump is good or bad for investors in EM assets. The diversity in EM assets and the potential for winners and losers make a single statement impossible. For example, while stock valuations continue to look attractive, our EM equity colleagues are optimistic thanks to the outlook for EM corporate earnings, which remains healthy.

Meanwhile, the fixed income perspective is a bit more nuanced. While frontier bonds denominated in hard currencies have been resilient since the presidential election, EM local currency debt has faced headwinds from the prospect of increased trade protectionism and a stronger US dollar. 

Declining inflation should support real yields across much of EMs, particularly in Latin America (LatAm), allowing LatAm central banks some breathing space to proceed with cautious rate cuts.

EM corporate debt appears to weather the storm relatively well, with spreads – the additional yields investors demand over comparable government bonds – remaining tight. 

In past periods of EM weakness, corporate debt has outperformed, suggesting many EM corporates will not be negatively impacted by US protectionism. 

Final thoughts

Trump’s impact on EMs may remain complicated for some time. While there are significant challenges, particularly in trade and sustainability, we believe there are opportunities for growth amid resilience. EM countries capable of leveraging these shifts, especially those involved in the diversification of supply chains away from China, stand to benefit in this evolving global landscape.

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