Possible return of Trump fuels concerns among investors in emerging markets

By Bansari Mayur Kamdar

(Reuters) – A close U.S. presidential race has unsettled emerging market investors, who fear that a return of former President Donald Trump to the White House could hurt emerging markets just as they were on the verge of regaining their glory.

The prospect of lower interest rates in the US has brightened the outlook for emerging market assets, which had lagged behind their developed market counterparts in recent years.

But analysts now fear that trade barriers could be strengthened under a second Trump presidency, which would lead to a renewed rise in inflation and thus interest rates, strengthen the dollar and ultimately put pressure on emerging markets again.

“Normally, this would be a good macroeconomic backdrop for emerging markets: robust growth, ongoing disinflation and a weak dollar,” Arun Sai, senior multi-asset strategist at Pictet Asset Management, told the Reuters Global Markets Forum (GMF).

“But we have to deal with two problems,” Sai said: China remains a burden on the global economy, and then there is the risk of higher tariffs and disruptions to world trade.

“EM will bear the brunt of the burden,” he said.

Trump has announced that he would consider imposing 60 percent tariffs on Chinese exports. According to economists at Barclays, this move could reduce China's GDP by two percentage points in the first twelve months.

For other US trading partners, a significantly lower universal tariff of 10% was proposed.

Oxford Economics found that such tariff levels could reduce bilateral trade between the United States and China by 70 percent and disrupt or divert hundreds of billions of dollars' worth of trade.

It is difficult for investors to predict when China's economy will turn around, said Manish Bhargava, CEO of Straits Investment Management.

“There should be a premium on risk in emerging markets, but that's not happening… India is good but expensive, China is cheap but has its own problems.”

In her first in-person debate, Democratic candidate Kamala Harris compared Trump's tariff plan to a middle-class value-added tax. Yet her campaign team supports Biden-era tariffs and even announces “targeted and strategic tariffs” for the future.

“A Harris administration would likely continue to impose tariffs, but would prefer to use them in combination with other tools such as clean energy investments,” said Rachel Ziemba, founder of the consulting firm Ziemba Insights.

Silver lining

The new tariffs proposed by Trump could be lower for China and other trading partners than the threatened tariffs, noted Mark Haefele, CIO of UBS Global Wealth Management.

On the other hand, Washington's efforts to “friendshore” – replacing China with friendly countries in supply chains – could give a boost to emerging economies allied with the United States.

India and key Southeast Asian economies such as Indonesia and Malaysia could benefit if supply chain diversification were to accelerate again, Haefele said.

“India is the best structural story in emerging markets, built on four pillars,” Malcolm Dorson, senior portfolio manager and head of emerging markets strategy at Global X ETFs, told GMF.

India's advantages include an attractive demographic structure, the potential for long-term growth, a market-friendly government and the fact that it is “in the right place at the right time” to benefit from China+1 trade, Dorson said.

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(Reporting by Bansari Mayur Kamdar in Bengaluru; Editing by Divya Chowdhury and Hugh Lawson)