Trump, the dollar and tariffs: What lies ahead for emerging markets in 2025?

13, Nov - NEWS

The hypothesis of a ‘golden mean’ 2025 for emerging markets after years of rising interest rates is now under threat from Donald Trump's imminent return to the White House. A stronger dollar, the prospect of higher tariffs in the US, unfunded government spending and a slowdown in Fed rate cuts have already impacted emerging market currencies and put pressure on government bonds. This has led investors to reassess the impact of Trump's policies on emerging market assets.

‘Despite the positive valuations of emerging market assets this year, we should take a more cautious stance in both local and hard currencies,’ said Erlan Syzdykov, head of emerging markets at Amundi. The prospect of a ‘red wave’ in which Republicans could gain control of the U.S. government would be a ‘game-changing element,’ he added. Investment inflows into emerging markets have rebounded after a period of low risk due to COVID-19.

During this period, investors favoured developed market assets as safer. Net inflows into stock and bond portfolios from emerging markets, which had fallen in 2022, have recovered to 250 billion dollars as of September 2024, according to the Institute of International Finance.

The Mexican peso fell 3.6% this week

JPMorgan's hard-currency emerging-market bond index, used to gauge investments, has posted about 6% returns so far this year, while local government bonds have stalled. That's reminiscent of 2016, when emerging-market currencies suffered after Donald Trump's surprise victory, Allianz Global Investors said in a note. Trump's victory is now putting pressure on China and emerging market currencies, Anders Faergemann said.

The Polish zloty and Hungarian forint fell to their lowest levels in two years as those countries depend on trade and risk facing tariffs Trump plans to impose. The Mexican peso, a benchmark among emerging market currencies, fell 3.6% this week after news of Trump's victory but then recovered losses. However, its fall was less severe than in 2016, when it lost 8%. Many observers are keeping a close eye on Trump's spending promises and the possible impact on Fed policy. Rising deficits could slow rate cuts.

Trump has moved closer to the Argentine president

However, some optimism is still present. Countries such as India could benefit from Donald Trump's tough approach to China, says Yerlan Syzdykov of Amundi, while Argentina should also attract investors with its programme of reforms and spending cuts.

Significant changes in the geopolitical context could also lead to a new deal. Ukraine's international bonds and treasuries rose sharply after Donald Trump's victory amid optimism that the conflict between Moscow and Kiev may be over. Argentine stocks and bonds also rose as investors anticipated closer ties with the United States, as Donald Trump is seen as close to libertarian Argentine President Javier Milieu.

Fear of volatility

Bankers had hoped that the surge in debt issuance seen since the start of the year would continue into 2025. But now some fear that volatility before and after Donald Trump's inauguration in January - traditionally a strong issuance month - could affect primary market issuance volumes. Barclays estimates that sales of international emerging market sovereign bonds will reach 160 billion dollars this year and about 130 billion dollars next year.

The high cost of debt could further restrict emerging markets' access to liquidity, which is already a major problem for organisations such as the International Monetary Fund (IMF). However, investors believe that the fear, market volatility and risk aversion that followed Donald Trump's victory in 2016 is less likely this time round. This means emerging markets and their assets retain some potential to continue to attract capital. ‘We've already seen Trump, so we've already seen this film - and we survived,’ summarises Yerlan Syzdykov of Amundi.