Trump Won. Now, What About Emerging Markets?

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Published on: Dec 11, 2024 9:00:00 AM

Donald Trump’s win has shaken global markets. Satrix unpacks what this means for emerging markets, from currency swings to trade wars.

US Elections
Donald Trump won 312 electoral votes surpassing the 270 needed to become president, while Kamala Harris received 226. Apart from painting the US map red, some markets also ended "in the red" as they reacted to the election outcome. Trump’s pro-business policies, plans for corporate tax cuts, and rising US bond yields translated into a strengthening US dollar environment. Since many emerging markets (EMs) have dollar-denominated debt, a stronger dollar increases their borrowing costs and, in some instances, leads to outflows from EMs.

Tariffs and Trade Wars
Emerging market equities and currencies typically experience heightened volatility during major geopolitical shifts. Following the news of Trump’s victory, the US dollar jumped by 2% against major world currencies, while EM currencies like the South African rand (ZAR), Mexican peso, and Chinese yuan weakened against the greenback.

Trump’s protectionist stance, including potential tariffs or trade wars, poses significant risks to export-driven economies, particularly in Asia and Latin America. He has already threatened possible tariff increases for countries like Canada and China via his Truth Social and X accounts. Additionally, he expressed his disapproval of the BRICS nations' efforts to move away from trading in US dollars, commenting with his plans to impose “100% tariffs” on BRICS countries who do so.

Market Volatility and Opportunity
If Trump’s infrastructure policies increase demand for raw materials, countries rich in natural resources stand to benefit. However, some of these are part of BRICS and, particularly as EM nations, could face the types of challenges highlighted at the conclusion of this newsletter if the China-US trade war intensifies. Alternatively, this could create opportunities for other US trading partners, like Vietnam, India, and Indonesia, who could capitalise on shifting trade dynamics. This was reflected in the market's response to Trump’s victory as the Indian rupee, Indonesian rupiah, and Brazilian real were among the few EM currencies that remained in positive territory when his victory was announced.

A resurgence of the US dollar could also impact local monetary policy trajectories. For instance, a weaker South African rand may put upward pressure on inflation rates, which have been easing. As a result, the South African Reserve Bank (SARB) may adopt a more cautious approach to interest rate cuts. Following a recent 0.25% rate cut, the SARB noted that while inflation is well-contained at 2.8% (based on the latest reading), the medium-term outlook carries significant uncertainties.

Market Moves in November
Trump will only be sworn in next year, but all eyes are on the implementation of his policies and the market's reaction over the month of November, as investors adapt to the so-called “Trump Trade.” US stocks performed strongly in November, with the MSCI US Index up 8.5%, the S&P 500 rising 8.1%, and the NASDAQ gaining 7.6%, all in ZAR terms. The MSCI India Index increased by 1.7%, outpacing the MSCI China Index, which unsurprisingly declined by 2.4% for the month. Despite facing volatility, emerging markets finished the month strong, with the MSCI Emerging Markets Index up 7.6%. The euro area was flat, as the MSCI Euro Index rose by only 0.4%, while the MSCI UK Index outperformed, gaining 3.6%.

Locally, the market ended the month in negative territory. The FTSE/JSE All Share Index declined by 0.9%, and the FTSE/JSE Top 40 Index fell by 1.6%. Resource stocks weighed heavily on local equities, dropping by 6.7% for the month, while Industrials and Financials managed modest gains of 0.1% and 0.3%, respectively. Meanwhile, the Listed Property Index extended its positive momentum, rising 1.7%, and the JSE All Bond Index recorded a strong 3.1% gain for the month.

Looking Ahead
Trump’s policies are inherently inflationary due to their protectionist and fiscally expansionary nature. However their actual impact depends on implementation, and since Trump has not yet been sworn in, the trade war and proposed tariff increases remain only plans for now. Increased government spending and the extension of rate cuts could drive demand, subsequently pushing inflation higher. Policies aimed at reducing regulatory burdens in industries such as energy and manufacturing could initially lower costs but may result in long-term inflationary effects by boosting demand and economic growth.

Rising US interest rates typically lead to capital outflows from EMs as investors seek higher returns in the US. This could weaken EM currencies and amplify inflation within these markets. Higher inflation in both the US and EMs may also delay the rate cycle, as central banks might need to maintain elevated interest rates for longer. This would slow global liquidity and raise borrowing costs, further pressuring EM economies.

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Any opinions, news, research, reports, analyses, prices, or other information contained within this research is provided by an external contributor as general market commentary and does not constitute investment advice for the purposes of the Financial Advisory and Intermediary Services Act, 2002. First World Trader (Pty) Ltd t/a EasyEquities (“EasyEquities”) does not warrant the correctness, accuracy, timeliness, reliability or completeness of any information (i) contained within this research and (ii) received from third party data providers. You must rely solely upon your own judgment in all aspects of your investment and/or trading decisions and all investments and/or trades are made at your own risk. EasyEquities (including any of their employees) will not accept any liability for any direct or indirect loss or damage, including without limitation, any loss of profit, which may arise directly or indirectly from use of or reliance on the market commentary. The content contained within is subject to change at any time without notice.

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