It is plausible that higher tariffs and more pro-growth policies may put upward pressure on US inflation, which then may reduce the pace at which US interest rates can be cut. In the days immediately after Trump’s victory, as widely expected the US dollar also strengthened, which conversely was reflected in weaker EM currencies.

Pragmatism and the art of deal-making

With the Republicans looking increasingly likely to retain control of the House of Representatives, and with the Senate already gained, this should certainly help Trump to pursue his policy agenda. Still, the need for pragmatism is well understood by Trump, who even in his book, ‘The Art of the Deal’, talks about the need for ‘never getting too attached to one deal or one approach’. This mindset will only have been strengthened by his earlier term in office. As such, while some of the more controversial ideas will have helped grab voter attention, in practice, some watering down should be expected. 

Should we worry about China at this point?

Under Trump’s presidency, it seems quite likely that trade tensions with China will increase. However, whether Trump really pursues the most aggressive (threatened) policy of imposing 60% or more tariffs on all Chinese exports to the US, remains to be seen. As noted before, more practically, when actually in power, the Trump administration may need to adopt a more moderate and transactional approach. And this may be particularly so once factors such as potential retaliatory China actions are also considered.

In any case, increased US tariffs would very likely have the silver lining of the Chinese authorities taking quite significant countervailing action to support the local economy. Indeed, on 8 November, the National People’s Congress, China’s rubber-stamp parliament, already announced a new RMB10 trillion local government debt restructuring package. While somewhat short of market expectations, China’s finance minister indicated clearly that further steps are coming, with the authorities looking at ‘intensifying countercyclical adjustments’.

It is worth remembering too that even before the US election, ever since the important stimulus announcement of 24 September, a clear shift towards more pro-growth policies was already evident in China. Going forward, Trump’s victory could well redouble the resolve of Chinese policymakers to forcefully counter any external challenges to growth. Ensuring policy credibility and stopping potential deflationary risks will also be at the forefront of their thinking.

Our positioning on China

In our China funds, we feel we are relatively well positioned for the US election outcome. The first thing to note is that, so far, there has nothing in the way of accentuated volatility, which may reflect the possibility that the market, despite ambiguous polling indications, had already largely priced in a Trump victory.

In terms of some of the specific actions we took ahead of the election, this included increasing exposure to higher conviction China names, where the key decision criteria were: 1) companies’ ability to defend and grow market share; 2) their ability to grow overseas earnings and with limited tariff risks; and 3) their ability to boost shareholder returns through dividends and/or buybacks.

In addition to this, in the China-A space, around 80% of the portfolio’s revenue is from domestic sources, while of the remaining 20% that is more externally derived, this is more focused on non-US regions. More broadly across all our China portfolios, for over a year, we had been steadily managing down holdings in stocks with higher US exposure, and often based on specific consideration of potential US tariff risks.

What does a Trump presidency mean for EM ex-China?

While a world of rising tariffs is clearly not ideal for non-China EMs either, the overall picture is in fact more balanced in several respects. Firstly, it is worth remembering that Trump is expected to be fiscally looser, including via tax cuts and spending aimed at ‘re-industrialisation’, which should boost US growth. And generally faster US growth tends to boost global growth via the exports channel for other countries. Clearly increased US tariffs might dampen this tendency, but on the whole, faster US growth should still be good for most other countries.

Secondly, if as widely anticipated, the most aggressive tariff measures will be targeted on China, then it's plausible that some of the previous US/China trade flows could be diverted to other EMs. Similarly, the second Trump presidency will likely only accelerate global multinationals’ efforts to diversify their global supply chains away from China – which again, could benefit other EMs especially.

Thirdly, it would be sensible to remember that there are several powerful long-term structural tailwinds underpinning ex-China EMs’ growth that are totally unimpacted by US politics. This includes factors such as large populations with growing incomes, improving technological progress, rising industrial capex and a growing corporate culture of looking to prioritise and improve shareholder returns.

Earnings and valuations

When considering the relative merits of any asset class, earnings growth prospects and valuations are always of paramount importance. And as shown below, these are perhaps EMs’ biggest trump cards at present, with EM equities projected both to grow their earnings by more, while also being considerably cheaper than both developed market (DM) and US counterparts. 

Table 1: Valuations are attractive 

Source: abrdn, Bloomberg, 31 October 2024. MSCI Indices, *MSCI China. PE - 12 month forward (rolling), PB – Historic. Monthly data points. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. No assumptions regarding future performance should be made. For illustrative purposes only. No assumptions regarding future performance should be made. 

Putting everything together

Putting everything together, it is true that the move to a Trump presidency could pose some challenges for EM countries. However, we think that in practice, Trump may have to steer a more pragmatic and transactional approach. It is also worth remembering that more pro-growth US policies should still be a positive for the world.

As the likely biggest target of new US tariff measures, we can be quite sure that China will look to take significant countervailing steps aimed at shoring up its growth. For non-China EMs on the other hand, they could actually be among the biggest beneficiaries of global trade and supply chain re-routing activity. Finally, politics aside, it is worth remembering that the earnings and valuation picture very much continues to favour EM equities.