While investors grapple with the implications of a second Trump term, the outlook for frontier bonds, EM local currencies, and EM corporate debt presents a mixed picture.

Frontier bonds

Resilience amid uncertainty

In the immediate aftermath of Trump's victory as the country’s 47th president, the market reaction for frontier market bonds has been surprisingly muted. Spreads on hard currency frontier bonds have moved only slightly wider, suggesting that investors are not overly concerned about the near-term implications of a Trump presidency.

There are no immediate headwinds from frontier market bonds following the US election, however, we do note that valuations for hard currency bonds are arguably at the expensive end, with spreads moving below their 10-year average. The pace of monetary easing in the US is likely to slow which could impact countries in the frontier space looking to regain market access.

On a more positive note, we believe hard currency debt will still benefit from the high carry narrative, along with low default risk over the next 2–3 years. Frontier local markets also continue to look attractive following some large FX devaluations earlier this year, and we anticipate a stronger US dollar will have a limited impact on these markets given the high nominal yields on offer.

More recently we have been adding risk in local markets, in particular Egypt, Nigeria, Pakistan, and Kenya. The low correlation of the asset class to US treasuries should also provide somewhat of a buffer for frontier bonds with idiosyncratic factors driving returns.

Emerging market local currencies

Facing challenges but value still to be found

We believe the outlook for emerging market local currencies is generally less sanguine, with many anticipating significant pressure on EM FX due to the Trump administration's proposed policies.

Trump’s second presidency will likely usher in aggressive tariff hikes likely for Chinese-made goods. This would be negative for EM local currencies versus the US dollar, as reduced US imports would likely support both US external accounts and the greenback.

We foresee Europe also suffering from imposition of tariffs – both directly and due to competition with Chinese exporters. As such, EM currencies may well not weaken much or at all versus the euro. However often in EMs the most notable risks are internal and country-specific, which underscores the need for careful country selection. Declining inflation, in countries such as Colombia, is supporting real yields and should enable rate cuts, even if we do have a slower easing cycle in the US.

Emerging market corporate debt

Resilience and selectivity

In contrast to the more challenging outlook for emerging market local currencies, we think a second Trump presidency paints a relatively sanguine picture for EM corporate debt.

Unsurprisingly, EM corporate debt remains resilient, spreads are slightly tighter with bonds not keeping pace with the move in rates. The all-in dividend yield at more than 6.5% continues to look attractive [1].

We expect the spillover effect from protectionist Trump policies to be relatively muted as in past periods of EM weakness, EM corporate debt has consistently outperformed. We remain underweight on Asia as we believe that it, along with Mexico, is likely to be most negatively impacted by increasing tariffs and higher financing costs.

Final thoughts

We believe the post-election landscape for EM debt presents a complex and nuanced picture. While frontier bonds have shown resilience, EM local currencies face headwinds from the prospect of increased trade protectionism and a stronger US dollar. EM corporate debt, on the other hand, appears to be weathering the storm relatively well, with spreads remaining tight and yields continuing to offer attractive returns. As investors navigate this shifting landscape, we believe the focus should be on careful country selection and a diversified approach to EM investments.