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Friday, September 20, 2024

What are the potential implications of the U.S. Election for emerging markets?

By Century Financial in 'Blog'

What are the potential implications of the U.S....
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U.S. election results often have short-term impacts on EM equities, but policy changes are typically more significant, mainly if they cause more USD strength. However, earnings and dividends are what ultimately drive long-term returns.

Before starting, let us establish the relationship between the US and the various emerging market countries.

Relationship between GDP growth in the US and emerging markets

Viewed from the top down, there is some relationship between GDP growth in the US and emerging markets (EM). The relationship has tended to vary, with EM growth decoupling during the late 1990s during the Asian Financial Crisis and China's emergence during the 2000s.

EM growth has some correlation with the US

Source: LSEG/IMF WEO. 613063

The impact on EM growth would be uneven across regions and individual economies. While some economies, such as Mexico, show a robust correlation with the increase in the US, others, such as Indonesia and parts of the Gulf Cooperation Council (GCC), have shown no correlation whatsoever.

Correlation between Emerging Markets and US Growth

Correlation of GDP growth with US since 1990

Source: LSEG/IMF WEO/Schroders. 613063

 

We will look at various potential implications of the US 2024 Elections in different aspects.

Currency

A Republican win could lead to more robust economic growth in the U.S. but might also bring higher inflation and interest rates.

This could make the U.S. dollar stronger initially, but it may create problems for emerging markets.

A stronger dollar makes borrowing more expensive for emerging market countries, especially those with a lot of debt in U.S. dollars .

This tighter financial situation might reduce foreign investments and slow growth in these markets.

In the past, assets in emerging markets have had ups and downs around U.S. elections due to uncertainty about new leadership.

The value of the U.S. dollar plays a significant role in these scenarios.

Trade Policy

Trade Policy: Changes in trade policy can impact emerging markets through the U.S. election. U.S. presidents have much power to influence trade, and tariffs have recently become essential.

A Republican administration, especially under Trump, might bring back tariffs, creating uncertainty. This could make emerging market assets less attractive, especially in countries that rely on exports, like Mexico and some Asian nations.

A Democratic administration may prefer working with other countries on trade, which could lower tensions and provide more stable access to global markets for emerging economies.

Chinese markets performed poorly during the trade war

Source: Refinitiv, Schroders Economic Group. 12 August 2022. 613063

Geopolitical Concerns

The election outcome could also affect global stability and markets by changing U.S. relations with key international players, such as China, Mexico, Argentina, Venezuela, and Russia.

Former president Trump has repeatedly expressed his preference to use tariffs as a trade policy tool actively and seems likely to take a more unilateral and isolationist approach to address cross-border issues, the analysts said

Effects in Asia: The U.S. election will have a mixed impact in Asia, bringing risks and opportunities. No matter who wins, U.S.-China relations are expected to stay tense.

Impact on Investments: More restrictions on Chinese tech companies are likely. This could push global investors to look at other markets, like Taiwan and South Korea, with substantial memory and semiconductor suppliers.

India's Growing Role: India might attract more investment as companies look for alternatives to China in the global supply chain.

Middle East and Europe: The election could significantly impact the geopolitical scene in the Middle East and Central and Eastern Europe.

Oil and Energy: If Republicans win, the U.S. may increase fossil fuel production, which could lower global oil prices and add pressure on Gulf oil exporters.

A Trump presidency would also likely lead to sharply reduced financial and military support for Ukraine and a weakened NATO, which would increase the geopolitical risk premium on European assets,” the analysts said.

Commodities

Under a Trump scenario, commodity prices might initially rise due to a "reflationary" effect. However, this boost may not last long because of expected relaxed regulations in the fossil fuel sector, leading to increased output and lower global energy prices.

It's assumed that oil prices could rise to around $90 per barrel in 2025 but then fall to about $60 per barrel by 2027, which aligns with the expected trend under a Harris scenario.

Changes in commodity prices impact emerging market (EM) economies in two ways: through the terms of trade (export prices vs. import prices) and inflation. A temporary rise in commodity prices would benefit EM exporters of natural resources, but as energy prices fall, commodity importers would ultimately benefit.

Oil exporters might not benefit from faster US growth if Trump deregulates fossil fuels

Source: LSEG/World Bank/IMF.613063

What is the MSCI World Index (USD)?

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries*. With 1,429 constituents, the index covers approximately 85% of each country's free float-adjusted market capitalisation.

Emerging Market (EM) equities are up 8% year to date, fueled by a rebound in Chinese stocks and structural narratives in Taiwan, India, and Korea.

The 2024 election could affect emerging markets, mainly through shifts in the U.S. macroeconomic landscape, trade strategies, and geopolitical relationships.

U.S. election results often have short-term impacts on EM equities, but policy changes are typically more significant, mainly if they cause more USD strength. EM investors benefit from having a long-term perspective, focusing on structural trends like middle-class growth and technological innovation, which are more likely to drive long-term performance.

MSCI EM Price Index 100 days prior to and following past U.S. presidential elections
Election Day equals 100, 1980-2020, local currency

Source: Congressional Budget Office, FactSet, MSCI, National Bureau of Economic Research (NBER), World Bank - World Development Indicators, U.S. Geological Survey - Mineral Commodity Summaries 2023, J.P. Morgan Asset Management. Data are as of July 15,2024.

The Bottom Line

The 2024 U.S. election could significantly impact emerging markets through changes in currency strength, trade policies, geopolitics, and commodity prices. This could challenge emerging markets, especially those with dollar debt or reliance on exports. While the election could cause short-term volatility, the long-term effects will depend on how these factors play out in the global economy.

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