Assessing what may happen is challenging due to the uncertainty surrounding the outcome of a close contest and the lack of detail surrounding many of the candidates' policies.

The results of a separate US congressional race are also important. A divided legislature would limit the new president's ability to implement policies, while a clear majority could lead to more extreme policy changes.

We explore the various scenarios and their potential effects on emerging market debt (EMD), focusing on the Fed’s influence and the direction of US trade policy.

A Harris victory

If Democrats control the White House and Congress, we can expect the vice president to continue many of the current administration's policies. Higher spending and tax hikes for companies and wealthier US households could initially stimulate the US economy, but these will eventually drag on growth, impacting corporate investment.

We may see US Treasury yields and the US dollar rise in the short term. However, in the medium term, emerging markets might gain as international investors seek other opportunities due to slower US growth, resulting in increased capital inflows.

While Harris can be expected to keep President Joe Biden’s trade policies, she will likely be more selective in targeting countries with tariffs, leading to less disruption. This is better for EMs, who play vital roles in global supply chains and are big commodity exporters.

Another important consideration will be her commitment to climate change and clean energy investments – which could benefit poorer and more vulnerable EM countries.

A Trump victory

Another Trump presidency, coupled with Republican control of the legislature, may boost the US economy through fiscal stimulus, such as unfunded corporate tax cuts.

This would likely be inflationary, limiting the Fed's ability to cut interest rates to support growth and putting upward pressure on the yields of US government debt and the US dollar.

This is the more negative scenario for emerging markets, amid higher funding costs, weaker emerging market currencies, and capital outflows from developing economies.

The former president’s tariff-focused trade policy could be more disruptive for global trade and deepen a trade war with China. This could lift US inflation, forcing the Fed to raise interest rates again, strengthening the US dollar. Investment outflows from EMs would likely follow.

His support for increasing US oil production could bring down global oil prices and lead to a rebalancing of capital flows between EM countries that are net oil exporters or net importers.

Congress divided

In scenarios where neither Democrats nor Republicans win control of the two chambers of Congress, the impact on core assets and emerging markets is less straightforward.

A Harris presidency might face fiscal brinkmanship, domestic debt-ceiling issues, and recurring lightning rods for inter-party disputes, while Trump may focus more on trade policy.

A divided legislature would limit a new president's ability to implement policies, except in foreign affairs and trade (where a US leader enjoys more autonomy).

Such division could lead to more moderate policy outcomes than a clean sweep by one party, which, depending on the reader's politics, can be either a hindrance or a good example of political checks and balances in action.

Trade policy and protectionism

Despite polarization in US politics, there is some bipartisan agreement on trade policy – specifically being tough on China (which appeals to many US voters). Regardless of the election outcome, the next US administration is expected to maintain a more protectionist stance on global trade. For example, the United State-Mexico-Canada Agreement (USMCA) renegotiation in 2026 appears contentious, regardless of who will be occupying the Oval Office.

Harris may focus on stable strategic alliances and trade agreements, supporting a rules-based international order. Trump may prefer bilateral deals and more fluid partnerships.

Role of the Fed

The Fed finally cut interest rates last month. EM central banks started cutting even earlier, but the Fed's example will encourage further monetary easing in these markets, which is suitable for EMD. Real rates in most EMs are above those in the US. This is especially true in Latin America. With inflation moderating in many EMs, their central banks will likely be cautious yet opportunistic in their upcoming rate decisions.

China also announced more aggressive easing measures following the Fed’s half-a-percentage-point cut. These include fiscal transfers and rate cuts to bolster domestic demand, although the scale of this step change in Chinese policy remains uncertain.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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