Trump and EMs: A return to (new) normalcy?

With Donald Trump’s re-emergence onto the global stage, there’s little doubt that EMs face interesting times ahead. Trump’s first presidency saw the break between the US and China, a widening of America’s fight against illicit trade (in goods and people) to its south, and the launching of global trade wars. As Trump assumes office in January, EMs will wonder what risks lie in store for them as he takes charge of a new government.

Moreover, unlike in 2016, Trump is intent on building a government in his own image, nominating close associates to key cabinet positions. This will worry the US’s close EM trading partners, particularly those which have large trade surpluses with the US, including China, Mexico, and Vietnam. These countries were counting on doves within the administration to moderate Trump’s ambitions. With these influences muted, what can EMs expect after the inauguration?

America First, back for a second time

We believe Trump’s own policy view is likely to be consistent with the ‘America First’ outlook from his first administration. That means a harsher environment for EMs in three major areas.

Firstly, tariffs, described as “the most beautiful word in the world”, will be dialled up. Trump’s previous administration waited until 2018 to impose tariffs on selected goods, we do not expect similar restraint this time. While China will be the focus of these tariff efforts, with Trump potentially tripling the tariff applied to Chinese imports, other countries will also be affected. Tariffs will likely curb export growth for the affected countries, weakening global economic growth.

Second, owing to the tariff surge (accompanied by tighter monetary policy) we believe the dollar is likely to remain strong. For EMs, with their exposure to offshore financing (largely dollar-denominated) this tightens financial conditions, restricting access to offshore financing. We find EM credit quality weakens in dollar appreciation cycles, and the downward drift of EM currencies will keep domestic inflation risks skewed upward.

Lastly, with global growth hampered by trade wars and a stronger dollar, and Trump’s efforts to spur domestic commodity independence, commodity prices (on which many EMs depend) could slide further. Many EMs, such as Peru, Malaysia and Brazil, rely on the export of commodities for their fiscal and external health. If Trump’s more radical policy objectives are realised, downward pressure on many commodities prices could dial up the already elevated fiscal stress in many EMs.

As Donald Trump once again shapes American policy, a gloomy case for much of EM is easy to make.

The art of the deal

Yet is the general gloom in EMs too broad? We believe so. Many EM countries can exploit the tumult of a new Trump administration as a spur for needed change or can trade concessions for improved market access. 

In China, which has been struggling with a persistent lapse in demand-side stimulus, a wave of tariffs could instigate renewed efforts to reflate the domestic economy. Mexico, which also has a large surplus with the US and which has seen their currency depreciate substantially since May, could trade market access for greater compliance on migration issues. Taiwan, which has a near-monopoly on the advanced chips needed to fuel the buildout of AI datacentres across the US, could offer to expand US chip production in exchange for reduced tariffs.

We believe the general quality of leadership in many EMs is adroit enough to adapt to the creative turmoil a Trump presidency would bring. While pessimism on the group seems warranted, for selective investors, there may be diamonds in the rough.

Spotting hidden gems

We remain optimistic that Trump’s re-election offers an opportunity for EMs that can adjust to a new transactional policy framework. We are constructive on the Mexican peso and Taiwanese dollar and remain watchful for event-driven repricing during Trump’s term.