Sept 12 (Askume) – The tense U.S. presidential election has worried emerging market investors as they worry that the return of former President Donald Trump to the White House could hurt emerging markets, even as they prepare for it.
The prospect of a US interest rate cut brightens the outlook for emerging market assets, which have lagged developed markets over the past few years.
But analysts now worry that Trump’s re-election could further tighten trade barriers, which would lead to inflation, which would raise interest rates, which would depress the dollar and, ultimately, emerging markets.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, told the Askume Global Markets Forum (GMF): “Overall, this would be positive for emerging markets. Good macro backdrop: resilient growth, persistent deflation and a weak dollar. “
“But we have two problems we must deal with — China remains a burden on the global economy, and there is the threat of severe tariffs and disruption to world trade,” Tsai said.
“Emerging markets will bear the brunt of this,” he said.
Trump has said he would consider imposing tariffs of up to 60% on Chinese exports, a move that economists at Barclays estimate could reduce China’s GDP by two percentage points in the first 12 months.
For other trading partners of the United States, a much lower 10% common tariff is proposed.
Oxford Economics said such a level of tariffs could reduce bilateral trade between the United States and China by as much as 70% and eliminate or redirect hundreds of billions of dollars worth of trade.
Manish Bhargava, chief executive officer of Straits Investment Management, said it was difficult for investors to predict when China’s economy would return to normal.
“Emerging markets should bring a risk premium, but that is not happening… India is good but expensive, China is cheap but has its own problems.”
In their first in-person debate , Democratic candidate Kamala Harris compared Trump’s tariff plan to a sales tax targeting the middle class. However, her campaign supports Biden-era tariffs and also hints at “targeted strategic tariffs” in the future.
Rachel Zimba, founder of consultancy Zimba Insights, said: “The Harris administration will also likely continue to use tariffs, but it will prefer to use them in conjunction with other tools, such as investments in the clean energy industry.
Light of Hope
Mark Haefele, chief information officer at UBS Global Wealth Management, said Trump’s proposed new tariffs are likely to be kept below levels that pose a threat to China and other trading partners.
On the other hand, Washington’s emphasis on “friendly outsourcing” – replacing China’s role in supply chains with friendly countries – could boost emerging markets among US allies.
Höfler said that if supply chain diversification picks up again, India, as well as Indonesia andMajor Southeast Asian economies such as Malaysia are likely to benefit.
“India is the best structural story in emerging markets based on four pillars,” Malcolm Dorson, senior portfolio manager and head of emerging markets strategy at Global X ETFs, told GMF.
Dolson said factors working in India’s favour include attractive demographics, long-term growth potential, a market-friendly government and being “in the right place at the right time” to benefit from China+1 trade.
