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Emerging markets braced for Trump tariffs threat

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Emerging markets braced for Trump tariffs threat


The outcome of the US election was supposed to be drawn out, hard to call, and heavily contested. 

In the end, it was none of the above. Donald Trump’s victory at the beginning of November turned out to be emphatic, quickly decided, and accepted with little or no fuss. But that does not mean there were no immediate consequences.

Within moments of Trump beating Democrat vice-president Kamala Harris to retake the White House, the dollar had soared to a four-month high. Although the US currency recently dropped as the new president called for lower interest rates and a softer stance on China tariffs, its strength could wreak havoc for emerging market bonds.

The consensus is that Trump’s policies around curbing illegal immigration, enforcing trade tariffs and lowering taxes will trigger price rises — and ultimately hinder the US central bank’s ability to lower interest rates.

“Dollar-denominated debt will rise as a result, which will seriously impact many emerging markets,” says David Gibson-Moore, president of consultancy Gulf Analytica.

Jean-Charles Sambor, head of emerging market debt at investment company TT International, agrees. “Trump’s decisive victory has led to much doom-mongering among economists and emerging market investors alike,” he says. “The consensus seems to have settled around a simple narrative that tariff threats will lead to higher inflation, less monetary easing and a stronger dollar,” he adds. 

“Amid a salvo of ‘America first’ rhetoric, EM equities have underperformed their US counterparts since the election, while outflows from EM bond funds have accelerated, taking total net withdrawals for 2024 to over $20bn,” Sambor points out.

Trade tariffs are clearly “very bad news” for emerging market debt, says Mike Riddell, portfolio manager at Fidelity International. But the key question for EM investors, he says, “is just how much of Trump’s tariff narrative is bark, and just how much is bite”.

If Trump does bite, then some emerging market economies will be hit harder than others. According to proprietary data from asset manager Ninety One, the likes of Malaysia, Czech Republic, Hungary, China and Mexico would be hardest hit, while Argentina, Israel, Kenya, Egypt and Uganda would suffer the least.

Market commentators suggest bond investors will need to focus on resilient markets with low external debt and strong domestic consumption. 

“The form and timing of US tariffs is obviously very hard to predict and, ultimately, it is the detail that will matter,” says Grant Webster, co-head of emerging market sovereign debt at Ninety One. “But the economies most exposed are those in which trade forms a large part of their GDPs, and those that run large surpluses to the US.”

He predicts those likely to gain — or, at least, to lose out less — are the Latin American economies aside from Mexico, which are more closed off and have less exposure to Europe and China via their supply chains.

“Think of Argentina, for example, which has a low level of exports to the US and a relatively closed economy,” Webster says. “Another notable winner is India. India, given its enormous domestic economy, has low exports to the US relative to GDP, is relatively closed, runs a high services balance, and is not deeply integrated into global supply chains.”

Gibson-Moore concurs. “India will emerge as a safe haven,” he predicts. “Despite the very real risks of a Trump administration, there are opportunities. Emerging markets with strong domestic fundamentals are better positioned to weather the storm.”

Indeed, many commentators believe the naysayers are being overly pessimistic given that investors have more information on what to expect from Trump this time around compared with 2016.

And, even then, there were several positives from the first Trump administration for emerging markets, recalls Carlos Carranza, portfolio manager at asset manager Allianz Global Investors.

“First, despite the volatility seen in EM assets over the first Trump administration, the returns for EM bonds were solid,” he says. “Dollar-denominated sovereign bonds delivered close to 25 per cent over the 2016 to 2019 period and, in fact, outperformed US high yield and US investment grade bonds.” 

Today, he believes the macroeconomic outlook remains constructive for emerging markets, with GDP growth in the US showing resiliency and the US Federal Reserve still committed to lowering interest rates.

Mark Mobius, chair of Mobius Emerging Opportunities Fund, agrees. “We expect there will be a revival of the US economy, which will be good for almost all nations, including emerging markets.”

Alan Siow, Ninety One’s co-head of emerging market corporate debt, adds that investors will be able to take comfort from the familiar and the fact “we have seen this movie before”.

“During the previous Trump administration, various tariffs and trade policy tools were threatened against China, for example,” he says. “And, in respect of China, despite a material increase in effective tariff rates, the economic impact was muted.”

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