But how true might this prove to be?
It is plausible that higher tariffs and more pro-growth policies may put upward pressure on inflation, which then may reduce the pace at which 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 the Deal
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.”1 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?
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 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 tariffs would very likely have the silver lining of the Chinese authorities taking quite significant countervailing action to support the local economy. Indeed, the National People’s Congress, China’s rubber-stamp parliament, already announced a new RMB10 trillion local government debt restructuring package earlier this month.2 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 to fiscal policy.3
It is worth remembering too that even before the US election, ever since the important stimulus announcement in 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.
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:
- It is worth remembering that Trump is expected to be fiscally looser, including via tax cuts and spending aimed at re-industrialization, which should boost US growth. And generally faster US growth tends to boost global growth via the exports channel for other countries. Clearly increased tariffs might dampen this tendency, but overall, faster US growth should still be good for most other countries.
- 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.
- 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 capital expenditures (CapEX) (Chart 1), and a growing corporate culture of looking to prioritize and improve shareholder returns.
Chart 1. Global investment expected to rise and benefit EM relative performance
Earnings and valuations
When considering the relative merits of any asset class, earnings growth prospects (Chart 2) …
Chart 1. Forecast earnings growth by region (%)
… And valuations (Table 1) are always of paramount importance.
Table 1. Valuations are attractive
Source: abrdn, Bloomberg, 31 October 2024. Note: MSCI Indices, *MSCI China. PE - 12 month forward (rolling), PB – Historic. Monthly data points. "P/E" refers to price-to-earnings ratio. "P/B" refers to price-to-book ratio. 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.
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 domestic counterparts.
Final thoughts
Putting everything together, it is true that the move to a Trump presidency could pose some challenges for EM countries. However, we believe that in practice, Trump may have to steer a more pragmatic and transactional approach. It is also worth remembering that more pro-growth policies should still be a positive for the world. As the likely biggest target of new 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 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 favor EM equities.
1 Trump, Donald J. (2015). Trump: The Art of the Deal (p. 384). Random House Publishing Group.
2 "China unveils $1.4 trillion local debt package but no direct stimulus." Reuters, November 2024. https://www.reuters.com/world/china/china-unveils-steps-tackle-hidden-debt-local-goverments-2024-11-08/.
3 "As Chinese stocks slide, should investors bet on a Beijing bazooka?" Financial Times, October 2024. https://www.ft.com/content/25a9c733-d9f1-4d29-b189-9c899a277a43.
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.
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