Well before the nearly disastrous events in Butler, PA, the US presidential race had been heating up, with the Democratic and Republican nominees Joe Biden and Donald Trump locked in a tight battle, according to the latest polls. While it's still too early to predict what will happen by November, what we do know is that Trump has been vocal about plans for aggressive trade measures if he wins in 2024. Therefore, it’s useful to consider ahead of time what impact such policies might have on asset prices, especially in emerging markets (EM).
The two candidates have significantly different trade policies, which could impact EM asset prices. Trump’s proposed 10% across-the-board tariffs and 60% China tariffs might be the starting point in negotiations, but we should expect more trade frictions under a Trump 2.0 scenario compared to a continuation of the Biden administration. In our view, tariffs would likely (1) weaken EM exchange rates (boosting the US dollar), (2) increase prices paid by consumers and (3) decrease margins/profits for exporters and producers.
As we discussed in a blog post earlier this year, Trump's trade views are well-known and lack the element of surprise that characterized his previous impromptu announcements on social media. Moreover, after experiencing a Trump presidency, governments and corporations worldwide have implemented contingency plans to manage global trade and supply-chain disruptions through nearshoring strategies. That said, Exhibit 1 shows the returns of EM and other asset classes following Trump’s victory in the November 2016 presidential election. Although medium-term factors may counterbalance some of these fluctuations, we suspect the initial market reaction to be similar in direction and scale as the 2016 move. With upcoming presidential debates, conventions and polling over the next three months, we expect some of the Trump premium to be reflected in asset prices.
EM has been shaken by renewed American exceptionalism so far this year, which pushed US rates higher by about 50 bps, using the US Treasury (UST) 10-year yield as a proxy, and created a broader headwind for EM trades (rates, foreign exchange and spreads). As US growth and inflation data started to turn lower (which supports USTs and theoretically would boost risk assets across the board), EM carry trades were hit by idiosyncratic developments in select EM countries such as fiscal concerns in Brazil and the surprise Mexico election outcome. In effect, the broader local markets rebound was limited.
Looking to the third quarter, EM carry trades should be able to recover as US data aligns more closely with our base-case scenarios, creating a more favorable backdrop for carry trades. However, the upcoming US elections could disrupt EM asset price recoveries as protectionist policies from a potential Trump 2.0 presidency would negatively impact EM. Given these crosscurrents, we anticipate attractive total return opportunities across the EM landscape, where tactical trading strategies can be rewarded.