Should Emerging Markets Root for Trump?

Uh, no

Photo by Dalton Caraway on Unsplash

With America facing a stark election choice on Tuesday, Europe is nervous, China is wary and Japan is consumed by its own political demons. But how will the results affect the great family of Emerging Markets?

“Family” is a generous term to apply to a group of countries that investors have lumped together because of their relatively low per capita income and relatively high growth prospects.  It’s even hard to imagine a human family that can accommodate a crew as different as Thailand and Peru, China and South Africa.  But their financial markets all share a direct dependence on robust global growth and a healthy investor risk appetite.  (We’ll save the quirky criteria from our friends at MSCI for another day.)

The betting markets have plumped for Donald Trump and there’s a reasonable interpretation that investors believe he’ll be good for the S&P 500, his own media company DJT and, of course, Bitcoin. But what about emerging markets?

On the historical record, Trump seems great for these markets.  Performance of the MSCI Emerging Markets Index reached a whopping 34% during his first three years in office before COVID-19 hit against to -12% in the Biden Administration’s first three years.  That’s probably not a fair comparison given the high inflation and rate hikes that followed the pandemic reopening, but those are the numbers.

And there’s a reasonable argument that for all his mixed messages on so many issues, Trump will try hard to deliver more tax cuts and more deregulation.  Yes, the deficit is bigger and rates are higher, but the thinking is that his efforts will be directionally positive.

Emerging Markets also depend on ample capital flows, cheap money and a healthy risk appetite, and we all know that Trump loves low interest rates.  The Federal Reserve may have second thoughts about the current path of disinflation if fiscal policy is goosing demand and the National Guard is deporting undocumented workers.  But maybe Trump’s browbeating of Jerome Powell will keep policy tilting dovish at first.

A Trump push for peace in Ukraine could be a double boon for most developing economies.  Not only would a settlement likely give Russia renewed access to global oil markets and the chance to boost production with Western technology, but Ukraine could reboot its own grain and fertilizer exports to ease the strain on emerging market food prices. 

The likelihood of much higher trade tensions may also present an opportunity, especially as Trump brandishes the threat of steep tariffs on China.  Already, U.S. tariffs have re-routed flows of Chinese goods through Vietnam and other South Asian markets.  Chinese investors are actively scouting investments in Mexico.  The IMF speaks tentatively of “’connector’ countries” that can serve as bridges between trading blocs. 

And since many of these countries are, let’s say, imperfect democracies, they may prefer a U.S. administration that is not always wagging its finger over human rights, free elections and the jailing of prominent political prisoners.

So, on first blush, Trump looks pretty good if you are one of these countries.  But maybe not so fast.

Inflation is still inflation and the shock from tariffs will drive prices higher in tit-for-tat retaliations.  Indeed, if tariffs become an acceptable tool of diplomacy, then price increases can strike at any time and inflation expectations are likely to react.  So will the Fed, keeping rates high, capital hiding in high risk-free rates and investors nervous about straying too far from home.

The trade war will likely create as many losers as winners in Emerging Markets.  If Mexico may win more Chinese investment, it will also draw much greater scrutiny from Washington on firms that are deliberately trying to circumvent sanctions.  The U.S.-Mexico-Canada trade agreement is due for a review next year, and Trump seems likely to make the Mexicans sweat.

Finally, a Trump Administration will have much less appetite to reinforce the International Monetary Fund and World Bank, two crucial institutions for many emerging economies even when they are not in trouble.  Current efforts to boost the size of their balance sheets for climate finance may stall as may efforts to reduce debt burdens for the poorest countries.

So as with many investments, there may be an easy bounce, but much bigger long-term risks for the world’s Emerging Markets from a second Trump administration.  They may feel relieved that they don’t really get to vote in any case or just frustrated that so much of their fate is still beyond their control.