Emerging markets (EMs) – particularly those vulnerable to US monetary policy, the strength of the US dollar and international flows of capital – must brace themselves for the implications of new, and often unorthodox, US leadership.  

The precise details of this new era of US policy remain unclear. Much will depend on the team Trump picks to pursue his ‘America First’ agenda. A lot will also rest on which of Trump’s threats are real, or just a negotiating tactic to extract concessions. 

Three common features crop up again and again in many analyses: the re-emergence of US inflation; a federal funds rate stuck at higher levels; and the return of confrontational trade policies.

That is bad news for many EMs, where central banks will find themselves constrained in how much they can cut interest rates and for governments who find themselves accused of unfair trade practices. This, in turn, could prove a headwind to EM asset prices.

That said, while bouts of political and market pressure may be hard to avoid, over time a wide range of winners and losers will be revealed – yet another reflection of the diversity that exists within emerging markets. 

My currency, your problem

Trump’s ‘pro-growth’ and ‘market-friendly’ policies – such as lower taxes and the push for deregulation – will likely lead to higher US inflation and interest rates. 

This will restrict the ability of many emerging market central banks to reduce their own interest rates since higher US rates reduce capital flows and put downward pressure on EM currencies. 

Countries like Mexico and Indonesia, sensitive to the US Federal Reserve’s (Fed) decisions and dollar strength, may face greater pressure. EM nations with significant fiscal concerns, such as Brazil, might also find it challenging to navigate this new landscape.

Trading places

Donald Trump’s stated trade policies, especially his favourite word and go-to-tool of intimidation (tariffs), create a complex and less predictable environment for EMs. 

A ‘pro-business’ Trump administration still has the potential to benefit many EMs through a stronger global economy and positive market sentiment. 

However, extensive trade conflicts, particularly with China, but also with other major trading partners and traditional allies open up a wide range of outcomes. Mexico, deeply economically linked with the US, is particularly vulnerable but may be the biggest beneficiary if the US prioritises diversifying away from China. 

For example, the review of the US-Mexico-Canada Agreement (USMCA) in 2026 is a critical test of regional trade relations. There are indications Trump will threaten tariffs in a bid to stem illegal immigration into the US across its  borders, rather than as a means to reduce imports of goods. 

EMs – such as Mexico, Vietnam, Korea and Taiwan – with large trade surpluses, those who could be accused of re-exporting Chinese goods (Vietnam, Malaysia, Mexico), or countries with high tariffs on their imports of US goods (such as Brazil and India) are likely to face occasional market pressure.

Chinese whispers

Trump’s first term in government led to restrictions on trade with China (which President Joe Biden’s administration kept). He has since threatened to increase tariffs on Chinese goods to a staggering 60% or more. We’ll have to wait and see whether he was being serious.

A second trade war would force China, the world’s No. 2 economy, to do more than it has done so far to support its own stuttering growth. This should stop much of the shock spreading to other EMs.

In time, many EMs will benefit as multinational companies reconfigure their global supply chains to protect themselves from geopolitical tensions. India and Mexico, in particular, appear well placed as factories move to less ‘risky’ alternatives in other countries. 

Drill baby, drill

Trump’s stance on sustainability adds another layer of complexity for EMs. He has promised to withdraw (once again) from the Paris climate accord and threatened to dismantle Biden’s Inflation Reduction Act (IRA). 

Trump’s administration is expected to increase oil and gas exploration on federal land, weaken the Environmental Protection Agency, and impose higher tariffs on imported clean technology. The US will not be a sustainability leader.

The rest of the world will push ahead with sustainability initiatives, regardless of whether the US is involved. But EMs will be hurt if the US doesn’t contribute to financial commitments to poorer countries in support of their energy transition and if its policy pivot adds to climate-related damage.  

What do investors think?

It’s hard to make a single statement about whether Trump is good or bad for investors in EM assets. The diversity in EM assets and the potential for winners and losers make a single statement impossible.  

For example, our emerging market equity colleagues are optimistic. Based on their own portfolios, stock valuations continue to look attractive, helped by the outlook for EM corporate earnings which remains healthy.  

Meanwhile, the fixed income perspective is a bit more nuanced. While frontier bonds denominated in hard currencies have been resilient since the US election, EM local currency debt has faced headwinds from the prospect of increased trade protectionism and a stronger US dollar. 

Declining inflation should at least support real yields across much of EMs, particularly in Latin America, allowing central banks there some breathing space to proceed with cautious rate cuts.

EM corporate debt appears to be weathering the storm relatively well, with spreads – the additional yields investors demand over comparable government bonds – remaining tight. 

In past periods of EM weakness, corporate debt has outperformed, suggesting many EM corporates will not be negatively impacted by US protectionism. 

Final thoughts

Trump’s impact on emerging markets, like the man himself, is complicated. While there are significant challenges, particularly in trade and sustainability, there are also opportunities for growth amid resilience. 

EM countries capable of leveraging these shifts, especially those involved in the diversification of supply chains away from China, stand to benefit in this evolving global landscape.