As Donald Trump gears up to return to the White House, investors in emerging markets are recalibrating their strategies, wary of economic headwinds and potential volatility ahead in 2025. While the hope was for a so-called “Goldilocks” year, with moderate inflation, steady growth, and favorable conditions, Trump’s victory signals a more complex outlook that could reshape global financial flows and policy decisions across developing economies.
Dollar Strength and Fiscal Policies Raise Concerns
The dollar’s strength, spurred by higher interest rates, is a primary concern for investors in emerging markets. The Federal Reserve has been gradually cutting rates following years of hikes, but with Trump in office, analysts speculate that fiscal policies could lead to a stronger dollar for longer periods. This development could restrict capital flows into emerging markets and make dollar-denominated debt more burdensome for economies dependent on external funding.
“Emerging markets had a positive outlook before the election, buoyed by resilient economic growth and higher yields relative to developed markets,” said Anders Faergemann, a senior portfolio manager with PineBridge Investments. “However, with Trump’s policies in play, the uncertainties around tariffs, potential fiscal expansion, and the dollar’s strength add layers of complexity.”
Data from the Institute of International Finance (IIF) shows that net portfolio inflows into emerging economies' stocks and bonds reached $250 billion through September this year, marking a significant rebound from the almost stagnant flow in 2022. But whether these trends can persist in 2025 under Trump’s presidency remains uncertain, with some analysts predicting a cautious stance from investors.
Geopolitical Implications: Winners and Losers
While some emerging markets face challenges, others could benefit from geopolitical realignments, especially in Asia and Latin America. India, for instance, could see an uptick in investment as U.S.-China trade tensions potentially deepen under Trump’s administration. “India stands to gain from Trump’s tough stance on China, as businesses may seek alternative production hubs,” said Yerlan Syzdykov, global head of emerging markets at Amundi. This shift could channel investments into sectors such as technology, manufacturing, and pharmaceuticals in India, where robust growth and a young workforce present unique opportunities.
Similarly, Argentina could gain traction in global markets, thanks to Trump’s close ties with Argentina’s recently elected libertarian President, Javier Milei. Known for his brash economic reforms, Milei has already made moves to stabilize Argentina’s economy through austerity measures. Investors have expressed cautious optimism about Argentina’s turnaround efforts, hoping for U.S. support in trade and investment.
In Eastern Europe, Trump’s presidency may influence Ukraine’s prospects. Ukrainian bonds rallied briefly after Trump’s election win on the speculation that he might push for diplomatic resolutions with Russia. Analysts suggest this optimism, if sustained, could benefit Ukraine’s war-ravaged economy by fostering a more favorable environment for international assistance and economic rebuilding.
Mexico and the “Strongman Trade”
Mexico's peso dipped initially after Trump’s win but rebounded quickly, avoiding the sharp devaluation seen in 2016. Experts credit this resilience to Mexico’s diversified trade partnerships and its strategic importance to the U.S. supply chain. However, the country’s economic reliance on the U.S. keeps it vulnerable to any shifts in U.S.-Mexico relations.
“Emerging market currencies like the Mexican peso remain bellwethers for global sentiment on trade,” noted Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management. “Mexico’s recovery speed indicates markets are more prepared, though the risk of new tariffs or trade frictions still exists.”
Countries with strong, sometimes authoritarian leadership are perceived by some investors as better positioned to respond to policy shifts and external pressures. This phenomenon, dubbed the “strongman trade,” could lead to increased capital flows into nations like Argentina and potentially Turkey, where leaders are expected to pursue decisive fiscal and monetary policies in the face of Trump’s U.S. policies.
Bonds, Rates, and Risk Appetite
Emerging market debt has drawn investors in recent years, with attractive yields offsetting the volatility typically associated with these economies. The JPMorgan Emerging Market Bond Index recorded a 6% return this year, largely fueled by improved economic fundamentals and the expectation of continued rate cuts. Yet, Trump’s proposed spending could alter the Federal Reserve’s rate trajectory, making rate cuts less frequent and dampening demand for emerging market bonds.
“Higher rates and a robust dollar are challenges, particularly for economies with significant external debt,” said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income. A shift in U.S. fiscal policy under Trump could increase debt costs, impacting sovereign debt issuances in emerging markets. Barclays projects a potential decline in sovereign international bond sales, expecting them to fall from $160 billion this year to around $130 billion in 2025.
In Ukraine, Argentina, and even high-yielding African nations, access to affordable debt is crucial for infrastructure projects, debt servicing, and social programs. A sustained strong dollar and interest rate fluctuations could exacerbate the financial strain on these economies, limiting access to critical funds and creating inflationary pressures.
Cautious Optimism Amid Familiar Risks
While investors are concerned about the short-term volatility expected around Trump’s inauguration, most believe that emerging markets could weather the storm more effectively than in 2016. The anticipated market gyrations might create entry points for long-term investments, particularly in sectors with strong growth narratives like technology and green energy.
“We’ve seen Trump before; we’ve seen that movie before — and we survived,” said Syzdykov from Amundi. He noted that investors have become more adept at navigating the tradeoffs Trump’s policies may present, as many developing nations have diversified away from a sole reliance on U.S. demand.
Countries in Asia, for example, are less dependent on U.S. exports than in the past. China, in particular, has shifted focus towards strengthening domestic demand and reducing the impact of potential U.S. tariffs. With strategic domestic policies, China and other Asian nations could manage trade uncertainties, bolstering local economies to offset reduced trade with the U.S.
Outlook for 2025 and Beyond
Looking ahead, emerging markets could still offer valuable opportunities for investors seeking diversification. However, the dynamics of global finance, U.S. fiscal policies, and trade relations will undoubtedly play significant roles in shaping investment strategies in 2025.
Analysts suggest that those who adopt a selective, diversified approach to emerging markets — focusing on resilient economies like India, China, and resource-rich nations — might navigate the turbulent waters more successfully. “There’s a sense that, despite the challenges, the emerging markets are still attractive for growth-seeking investors,” remarked Khan.
With Trump’s return to office imminent, the strategies for emerging market investments are evolving. Investors are keeping a close eye on Washington, recalculating risks, and readying for what promises to be another unpredictable phase in the global economic landscape.
(Source:www.reuters.com)
Dollar Strength and Fiscal Policies Raise Concerns
The dollar’s strength, spurred by higher interest rates, is a primary concern for investors in emerging markets. The Federal Reserve has been gradually cutting rates following years of hikes, but with Trump in office, analysts speculate that fiscal policies could lead to a stronger dollar for longer periods. This development could restrict capital flows into emerging markets and make dollar-denominated debt more burdensome for economies dependent on external funding.
“Emerging markets had a positive outlook before the election, buoyed by resilient economic growth and higher yields relative to developed markets,” said Anders Faergemann, a senior portfolio manager with PineBridge Investments. “However, with Trump’s policies in play, the uncertainties around tariffs, potential fiscal expansion, and the dollar’s strength add layers of complexity.”
Data from the Institute of International Finance (IIF) shows that net portfolio inflows into emerging economies' stocks and bonds reached $250 billion through September this year, marking a significant rebound from the almost stagnant flow in 2022. But whether these trends can persist in 2025 under Trump’s presidency remains uncertain, with some analysts predicting a cautious stance from investors.
Geopolitical Implications: Winners and Losers
While some emerging markets face challenges, others could benefit from geopolitical realignments, especially in Asia and Latin America. India, for instance, could see an uptick in investment as U.S.-China trade tensions potentially deepen under Trump’s administration. “India stands to gain from Trump’s tough stance on China, as businesses may seek alternative production hubs,” said Yerlan Syzdykov, global head of emerging markets at Amundi. This shift could channel investments into sectors such as technology, manufacturing, and pharmaceuticals in India, where robust growth and a young workforce present unique opportunities.
Similarly, Argentina could gain traction in global markets, thanks to Trump’s close ties with Argentina’s recently elected libertarian President, Javier Milei. Known for his brash economic reforms, Milei has already made moves to stabilize Argentina’s economy through austerity measures. Investors have expressed cautious optimism about Argentina’s turnaround efforts, hoping for U.S. support in trade and investment.
In Eastern Europe, Trump’s presidency may influence Ukraine’s prospects. Ukrainian bonds rallied briefly after Trump’s election win on the speculation that he might push for diplomatic resolutions with Russia. Analysts suggest this optimism, if sustained, could benefit Ukraine’s war-ravaged economy by fostering a more favorable environment for international assistance and economic rebuilding.
Mexico and the “Strongman Trade”
Mexico's peso dipped initially after Trump’s win but rebounded quickly, avoiding the sharp devaluation seen in 2016. Experts credit this resilience to Mexico’s diversified trade partnerships and its strategic importance to the U.S. supply chain. However, the country’s economic reliance on the U.S. keeps it vulnerable to any shifts in U.S.-Mexico relations.
“Emerging market currencies like the Mexican peso remain bellwethers for global sentiment on trade,” noted Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management. “Mexico’s recovery speed indicates markets are more prepared, though the risk of new tariffs or trade frictions still exists.”
Countries with strong, sometimes authoritarian leadership are perceived by some investors as better positioned to respond to policy shifts and external pressures. This phenomenon, dubbed the “strongman trade,” could lead to increased capital flows into nations like Argentina and potentially Turkey, where leaders are expected to pursue decisive fiscal and monetary policies in the face of Trump’s U.S. policies.
Bonds, Rates, and Risk Appetite
Emerging market debt has drawn investors in recent years, with attractive yields offsetting the volatility typically associated with these economies. The JPMorgan Emerging Market Bond Index recorded a 6% return this year, largely fueled by improved economic fundamentals and the expectation of continued rate cuts. Yet, Trump’s proposed spending could alter the Federal Reserve’s rate trajectory, making rate cuts less frequent and dampening demand for emerging market bonds.
“Higher rates and a robust dollar are challenges, particularly for economies with significant external debt,” said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income. A shift in U.S. fiscal policy under Trump could increase debt costs, impacting sovereign debt issuances in emerging markets. Barclays projects a potential decline in sovereign international bond sales, expecting them to fall from $160 billion this year to around $130 billion in 2025.
In Ukraine, Argentina, and even high-yielding African nations, access to affordable debt is crucial for infrastructure projects, debt servicing, and social programs. A sustained strong dollar and interest rate fluctuations could exacerbate the financial strain on these economies, limiting access to critical funds and creating inflationary pressures.
Cautious Optimism Amid Familiar Risks
While investors are concerned about the short-term volatility expected around Trump’s inauguration, most believe that emerging markets could weather the storm more effectively than in 2016. The anticipated market gyrations might create entry points for long-term investments, particularly in sectors with strong growth narratives like technology and green energy.
“We’ve seen Trump before; we’ve seen that movie before — and we survived,” said Syzdykov from Amundi. He noted that investors have become more adept at navigating the tradeoffs Trump’s policies may present, as many developing nations have diversified away from a sole reliance on U.S. demand.
Countries in Asia, for example, are less dependent on U.S. exports than in the past. China, in particular, has shifted focus towards strengthening domestic demand and reducing the impact of potential U.S. tariffs. With strategic domestic policies, China and other Asian nations could manage trade uncertainties, bolstering local economies to offset reduced trade with the U.S.
Outlook for 2025 and Beyond
Looking ahead, emerging markets could still offer valuable opportunities for investors seeking diversification. However, the dynamics of global finance, U.S. fiscal policies, and trade relations will undoubtedly play significant roles in shaping investment strategies in 2025.
Analysts suggest that those who adopt a selective, diversified approach to emerging markets — focusing on resilient economies like India, China, and resource-rich nations — might navigate the turbulent waters more successfully. “There’s a sense that, despite the challenges, the emerging markets are still attractive for growth-seeking investors,” remarked Khan.
With Trump’s return to office imminent, the strategies for emerging market investments are evolving. Investors are keeping a close eye on Washington, recalculating risks, and readying for what promises to be another unpredictable phase in the global economic landscape.
(Source:www.reuters.com)
