Positioning EMD ahead of the US election

If Kamala Harris wins November’s vote, the status quo is unlikely to change significantly, but should Donald Trump triumph the implications for foreign policy and emerging market debt (EMD) are likely to be far-reaching: 

• A Trump presidency 2.0 is likely to involve a reinvigorated focus on the Chinese yuan traded in the offshore market. Tariffs, meanwhile, are expected on a range of sectors, including Chinese electric vehicles (EVs), which could materially hit aluminum and copper prices.
• It is a likely possibility that Trump will look favorably on West-leaning governments that are open to capital investment. A prime benefactor in this respect would be Argentina under the leadership of President Javier Milei, who has enthusiastically supported Trump and various US conservatives.
• In eastern Europe, there are a number of governments in the region that are ideological bedfellows – such as Viktor Orbán in Hungary – who will likely seize on the opportunity to make political capital. However, they will also face demands to increase their defense spending. Moreover, if as is likely, tariffs are levied on EU exports to the US, the region will be proportionately affected.

China tensions

The first Trump presidency (2017-2021) irrevocably shook-up US policy towards China, and this fractious approach towards the Beijing government is likely to continue whoever wins in November. In many ways, it represents one of the few examples of bi-partisan consensus in Washington – and unilateral action on trade restrictions and tariffs looks set to stay.

In recent interviews, Trump has talked about how his approach towards China might evolve if he were to win a second term-with a reinvigorated focus on the Chinese yuan traded in the offshore market–and measures to address exchange rate manipulation. He is likely to face opposition from a number of leading global corporates in the US. Tech giant Apple, for example, is extremely wary of trade tensions as China is one of its biggest markets. 

Our base case under a Trump 2.0 presidency is that some sort of US-China accommodation will eventually be reached, with the Beijing government making concessions on market access, as it did previously with US agricultural imports. But it will be a bumpy ride.

Latin America pressure

Although the impact of a new Trump administration will vary on a country-by-country basis, certain common themes will broadly flow across Latin America. The baseline expectation is that President Trump will ramp up pressure on Mexico – and other central and South American nations – and address the migration crisis that has overwhelmed the United States’ southern border.

From an economic perspective, the immediate impact is likely to be an overall reduction in remittances from income earned in the US and sent home. That being said, however, our belief is that there will also be the opportunity for the realization of benefits for specific countries that are receptive and cooperative with Trump’s approach.

Commodity prices

Under a Trump presidency 2.0, tariffs are expected on Chinese electric vehicles (EVs), which could materially hit aluminum and copper prices. Meanwhile, a returning president Trump could ratchet up sanctions on Iran, but they probably won’t be as effective this time around as there is currently a slight surplus in oil production. Moreover, a natural slowdown in global trade will also hit the oil price.

Eastern European challenges

Under a second Trump presidency, Ukraine looks set to be the most obvious loser (compared with the status quo under a President Harris.) Official creditors have agreed a debt standstill to 2027 – but that could be unpicked by an incoming US administration to put pressure on Ukraine to enter peace talks. The Group of Creditors of Ukraine includes Canada, France, Germany, Japan, the United Kingdom and the US. 

In the event of a Trump victory, we anticipate that the G7 initiative on using Russian Euroclear holdings to finance Ukraine’s war needs and reconstruction costs could potentially be unpicked by the new administration, eager to use the deal as leverage to initiate peace talks and find a resolution to the war.

In terms of the rest of eastern Europe, there are a number of governments in the region that are ideological bedfellows – such as Viktor Orbán in Hungary – who will likely seize on the opportunity to make political capital. However, they will also face demands to increase their defense spending. Moreover, if as is likely, tariffs are levied at EU exports to the US, eastern

Europe will be disproportionately affected. 

A lot of manufacturing in the region covers segments such as white goods – or German cars offshored to eastern Europe – and EU tariffs are likely to be punitive at a time when regional governments are facing additional budgetary pressure from increased defense spending. As a result, taxes or borrowing may increase in the region at a time when domestic economies may be slowing down.

Read the full paper: Positioning EMD ahead of the US election (federatedhermes.com)