The risks and rewards for emerging markets under a Trump-led US

Donald Trump’s next administration could have a huge impact on emerging markets Asia. So far, the ‘Trump risk’ has been much less than we feared as, we suspect, a Trump victory was already priced into the market.

Leading up to the US election, the ‘Trump trade’ played out for most of October as he led the way in most swing states and it was only towards the end of the month that Kamala Harris moved up the polls. Therefore, market reaction was more muted this time around relative to Trump’s first victory which came as a genuine surprise.

Key appointments

In the weeks since, the equity and fixed income markets have given their indication of likely policy direction being pro-business and pro-technology. We tend to agree. However, some of his more aggressive policy announcements – deporting illegal immigrants, for example – look inflationary. The 10-year Treasury curve moved upwards, signalling the usual emerging market duration risk.

The first of two key announcements was the nomination of Scott Bessent as Treasury Secretary, assuming approval by the Senate. He has strong Wall Street credentials and has previously been a great advocate of debt reduction. The market approved, though we also saw the dollar weaken suggesting it thinks Bessent can better control the debt trends.

The second was a round of tariff increases. They were milder than we expected, with ‘only’ a 10% additional tariff increase on goods from China on his first day in office – he had campaigned on much higher numbers. There were also tariff announcements for Mexico and Canada, related, we think, to the renegotiation of their trade deal (NAFTA 2.0) which is up for renewal.

US/China relationship

The biggest question for us is how the US/China relationship will evolve under Trump as there are plenty of China hawks in the administration. We see four scenarios: (1) a deal between the two around trade, tariffs, US manufacturing and so on; (2) a managed decoupling over the long term – pretty much what we have now – with the two drifting apart on many fronts but still inter-dependent on key trade items; (3) an unmanaged decoupling, where the relationship breaks down over the next two years or so; (4) a direct crisis/conflict.

Our base case is for a managed decoupling, built around our longer-term narrative for emerging markets and Asia over the coming decade and a ‘New Multipolar World’. However, we do see the probability of an unmanaged decoupling increasing slightly with some of Trump’s key administration appointments.

The pros and the cons

From our point of view, there is one likely risk and one likely benefit of Trump as president. The risk is that many countries (and therefore companies) will likely be hit with tariff increases. Hopefully, his tariff policies are merely negotiation tactics. We do not see manufacturing moving back to the US in a hurry so will ultimately be a direct extra tax (inflation) on the US consumer and Asian companies will probably be hit due to higher prices.

The likely benefit is that Trump will push for lower taxes and less regulation which we believe will be bullish for the large US technology companies and hyperscalers. If they have strong/stronger earnings we see a greater likelihood they will invest more in their fight for AI leadership which will impact South Korean and Taiwanese technology companies, a large part of the Asian investment universe.

We believe India could be one of the big winners from Trump being elected. On most risk and export-related models, it is forecast to be the least negatively impacted country from a Trump presidency.

Over the medium to longer-term, Trump carries additional direct risk for the US but his impact could be felt further afield, as most policies indicated so far are stagflationary. This will likely limit the Fed’s monetary (easing) cycle which, combined with tariffs and the impact on trade, would lead to a stronger dollar. Given Trump is trying to front-load growth, he will drive up debt levels in the US, which is likely to turn into a higher term premium in the Treasury market. None of this is long-term bullish for any duration asset.

Outlook

The key question becomes ‘Is this time different?’. The last time we saw even low levels of stagflation, it hit emerging markets harder than the US, the root of the problem, which survived on its so-called exceptionalism. We bow to history but believe fundamentals are on our side. Asian equities have a good chance of becoming the new global growth engine and the anti-debt trade – this is all part of our ‘New Multipolar World’ narrative.

We believe much of the risk is already priced into the market. However, whenever Trump says anything negative about China, there is a risk of markets reacting the following day. Geopolitically, we see more risk to Europe than Asia in the coming period.

On the positive side, underlying economic fundamentals – excluding China – are stacking up nicely and valuation levels are low, reflecting much of the risk already. We believe that eventually fundamentals will prevail. It is interesting to note that during the last Trump presidency, emerging markets and Asia outperformed US small caps (as per the Russell 2000 Index) and gave a positive absolute return.

By Jorry Noeddekaer, lead manager of the Polar Capital Emerging Market Stars Fund

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