What Trump 2.0 Could Mean for Emerging Markets.
Trump and the Republican Party have made a dominant return to the U.S. political scene, setting the stage for substantial policy changes that could have a profound impact on the economic and geopolitical outlook for emerging markets (EM). Donald Trump’s remarkable political resurgence, with his re-election as the 47th President of the United States, has been further bolstered by the Republicans’ control of both the House and Senate, granting them significant influence over the U.S. policy agenda.
Initially, markets responded by selling off EM currencies, which caused a sharp rise in the U.S. dollar. The bond market’s reaction was evident through a bear steepening of the U.S. Treasury yield curve, with longer-dated bond yields increasing and expectations of a higher federal funds rate, putting pressure on EM interest rates.
Since then, two-year U.S. Treasury yields have risen slightly more than the 10-year yields as near-term price expectations have increased. Meanwhile, foreign exchange (FX) movements have been mixed. The dollar’s initial gains were reversed within a day but have since resumed, pushing the U.S. Dollar Index up by 2% compared to the eve of Election Day, continuing to exert pressure on EM currencies.
The market response underscores the uncertainty surrounding U.S. policy for emerging markets, even though the prevailing sentiment appears to be pricing in higher U.S. nominal growth and potentially fewer opportunities for the Federal Reserve to lower policy rates.
There are still many unknowns regarding Trump’s domestic and foreign policy agenda, and it will take time for these to become clearer. Even as the general framework starts to take shape, ongoing uncertainty is likely to complicate the task of assessing its impact on emerging markets.
Given the uncertainty surrounding Trump 2.0, we analyze the potential effects on emerging markets through four broad channels:
- The effect of U.S. monetary and fiscal policy on emerging markets (EM)
- Changes in global trade dynamics
- The influence of U.S. foreign policy on global conflicts
Trump’s reflationary policies could dampen the speed at which central banks in emerging markets reduce rates.
Key components of Trump’s agenda – including tax cuts, increased tariffs, and reduced immigration – are expected to be inflationary for the U.S., limiting the Federal Reserve’s ability to implement rate cuts. The only potential relief could come from increased oil drilling.
Our baseline scenario for the Fed’s rate path anticipates one more 25 bps cut in December, followed by similar quarterly reductions throughout 2025. However, the risks lean towards a slower and more gradual pace of cuts.
A more market-friendly, policy-driven Trump 2.0 could be less restrictive for EM policymakers. US tax cuts and deregulation may provide a continued boost to corporate earnings and support global risk-on sentiment. If the most severe tariff hikes proposed by Trump are averted, this could relieve pressure on currencies against the USD, while stronger US nominal growth would enhance global trade.
In this scenario, elevated trade uncertainty would likely drive-up risk premiums and hurdle rates, maintaining a cautious sentiment in EM markets and limiting corporate investment.
The US-China decoupling could potentially benefit certain emerging markets.
Trump has threatened a 60% tariff on all Chinese trade, along with a universal 10% tariff on other imports, partly to finance his planned tax cuts.
During his first term, tariffs were either threatened or imposed as a strategy to secure concessions from trading partners. This time, we believe a significant and lasting increase in US tariffs on China is likely, but the threat of a universal baseline tariff is primarily being used as a negotiation tool.
The failure of the Phase One trade deal – which only saw Chinese purchases of US goods rise by $20 billion instead of the $200 billion agreed – makes us think a deal this time is less probable, though still possible. Instead, the increased tariffs on previously targeted goods seem to be driven by the goal of reducing the bilateral deficit and dependence on Chinese products, part of a broader economic decoupling.
US foreign policy will influence the level of conflict risk.
The US’s approach to geopolitics, especially regarding ongoing or potential conflicts, will significantly influence market perceptions of tail risk. The next president’s handling of conflicts in Ukraine and the Middle East will be pivotal.
Trump has vowed to end the Ukraine-Russia war immediately upon taking office and has expressed skepticism about providing continued aid to Ukraine. While a ceasefire would be beneficial for markets, we believe he may be overestimating his ability to secure peace quickly, or even at all.
During his first term, Trump was a staunch supporter of Israel, moving the US embassy to Jerusalem and adopting a hawkish stance toward Iran. Although his relationship with Israeli Prime Minister Benjamin Netanyahu may evolve, we expect him to strongly support Israeli Defense Forces’ operations and intensify sanction threats on Iran.
Tensions in the Taiwan Strait and South China Sea will also depend heavily on the stance of the next US administration.
Trump has occasionally criticized the cost of US support for Taiwan during his rallies, raising some concerns about weakening strategic ambiguity. However, given the US’s reliance on high-end semiconductors for its military, it is likely the status quo will be maintained.
The impact of a Trump 2.0 administration on US markets could be significant, influenced by a mix of policies aimed at stimulating economic growth, reducing regulations, and reshaping trade dynamics.
- Tax Cuts and Deregulation: A continuation or expansion of tax cuts, particularly corporate tax reductions, could bolster corporate earnings and investor sentiment, leading to potential stock market gains. Deregulation, particularly in industries like energy and finance, could further enhance business profitability, providing additional tailwinds for US equities.
- Trade Policies and Tariffs: Trump’s “America First” trade policies may introduce volatility, especially if tariffs on China or other countries are increased. While higher tariffs might protect domestic industries, they could also lead to higher consumer prices, supply chain disruptions, and trade tensions, which may weigh on markets. However, if a more market-friendly approach is adopted, such as avoiding significant tariff hikes, it could stabilize market sentiment.
- Infrastructure and Energy: Trump’s focus on expanding oil production and infrastructure projects could support sectors like energy, construction, and materials. These areas could experience growth, particularly if new policies encourage investment in US energy independence or domestic infrastructure development.
- Interest Rates and Inflation: Trump’s potential reflationary policies, such as tax cuts and increased government spending, could exert inflationary pressures, influencing the Federal Reserve’s interest rate decisions. While markets may initially respond positively to stimulus measures, rising inflation could lead to higher interest rates, which may dampen stock market performance, particularly for high-growth sectors.
- Geopolitical Risk: Trump’s foreign policy decisions, especially in relation to China, Russia, and the Middle East, could create uncertainty. Markets might react negatively to heightened geopolitical tensions, but any resolution or de-escalation could lift investor confidence. His stance on Taiwan and the South China Sea could also introduce volatility, with the potential for sudden market shifts based on diplomatic developments.
In summary, while Trump 2.0 could spur short-term market optimism due to his pro-business agenda, the longer-term impact will depend on how his policies affect inflation, trade relations, and geopolitical stability. The potential for increased volatility, especially in trade and foreign relations, should also be considered as a key risk factor for US markets.