Emerging markets What does a decisive Republican victory mean for emerging markets?

Donald Trump won on a platform advocating lower taxes, deregulation, strict immigration control, a focus on domestic interests over international affairs, and higher trade tariffs. There is considerable uncertainty regarding the sequence and extent of policy implementation. However, the strength of the mandate may narrow the gap between campaign proposals and actual policies.

Few emerging markets are expected to thrive amid increased uncertainty over global trade, US waning support for multilateral institutions, and a deepening fragmentation of the global economy. The cross-border movement of people, capital, goods, and services is likely to face increased friction; this will be coupled with higher US interest rate volatility, as markets digest Trump’s fiscal proposals. Indeed, the near-term post-election environment appears challenging for emerging markets, despite tailwinds related to China’s stimulus and further Federal Reserve rate cuts.

Equities

Even in this complex backdrop, we expect emerging market stocks to deliver mid- to high-single-digit returns driven by earnings growth. North Asian markets, particularly Taiwan, offer appealing upside potential from the artificial intelligence wave. India, with its domestic focus and “geopolitical swing state” status, also presents attractive growth opportunities. We also favor South Africa, benefiting from domestic reform momentum and favorable valuations.

For China, Trump’s victory clouds the near-term outlook. Nonetheless, recent domestic policy signals since late September indicate a strong commitment to stabilizing the economy, providing a cushion for market sentiment. We are monitoring the upcoming National People’s Congress Standing Committee meeting, expected to unveil more detailed support addressing cyclical and structural challenges.

Higher tariffs could negatively impact companies with significant US revenue exposure. Mexico appears especially vulnerable, at least initially. We expect the bilateral relationship to eventually stabilize, as Mexico's role in North American manufacturing is crucial for competitiveness and for keeping US inflation low.

Bonds

Emerging market bond spreads over US Treasuries have been supported by resilient global growth. Emerging market sovereigns are also seeing moderate net positive ratings actions this year, concentrated in countries that have improved their fiscal trends. Sovereigns like Brazil, Costa Rica, Paraguay, Oman, Serbia, Qatar, and Turkey have been upgraded, helping the asset class remain resilient to recent US interest rate volatility.

Emerging market US dollar-denominated bonds—although largely rated as investment grade—offer interest rates of 6.5-7.0%, well above those of US high-yield bonds. We expect emerging market bond spreads to remain stable over the next six to 12 months, allowing investors to achieve high-single-digit returns. Emerging market bonds also provide broad diversification across countries, limiting exposure to those targeted by US tariff policy.

Currencies

Emerging market currencies may remain under pressure in the near term due to upward moves on US Treasury yields and uncertainties surrounding Trump’s tariffs. However, it is unlikely that the US dollar’s gains will be sustained. Unlike in 2016, the Fed is in a cutting cycle, the fiscal deficit is higher, and US dollar valuations are stretched. Thus, we maintain a view of medium-term dollar weakness, which should eventually support emerging market currencies.

The CNY and MXN are particularly exposed to US policy changes. We have raised our USDCNY forecasts for the next year to as much as 7.5 to reflect moderate depreciation. In the short term, the People’s Bank of China (PBoC) is likely to contain currency spikes. However, in the medium term, the risk for the currency will likely be skewed toward depreciation.

In the short term, we believe that the MXN could depreciate to as much as 21 against the US dollar, given external trade and tariff uncertainty, and domestic reform noise. However, we expect the Mexican peso to eventually recover to around 19.5 by the end of 2025, as we believe the fundamentals of the bilateral relationship with the US will hold.

Main contributor – Alejo Czerwonko

Original report - What does a decisive Republican victory mean for emerging markets?, 7 November 2024.