The words and deeds of US President-elect Donald Trump and his administration could have a huge impact on emerging markets and Asia. Now we have had a few weeks to understand what that new administration will look like and analyse more of Trump’s rhetoric so far, we feel we have a much better understanding of the likely policy direction.
We now have clarity on the outcome and can start to search for similar clarity with regard to which policies we can expect under a Republican clean sweep.
Trump’s victory sends a very clear signal about where the US stands politically. The Democrats failed to convincingly demonstrate how they could improve the everyday lives of Americans compared to Trump. The uncontrolled inflation that the Biden administration created by keeping fiscal policy too loose for too long probably cost them this election.
For us so far, the ‘Trump risk’ to emerging markets and Asia has been much less than we feared – admittedly it is very early days – remembering his first presidential term. We suspected that a Trump victory was already priced into the market, as emerging markets and Asia had been risk averse for some time, with US politics, geopolitics and inflation being the big topics. This means Trump winning the election should not be a massive surprise. Betting firms turned out to be significantly better forecasters than traditional polling firms that, once again, did a poor job, missing the ‘Red sweep’ entirely.
The ‘Trump risk’ to emerging markets and Asia has been much less than we feared
Leading up to the election on 5 November, the so-called ‘Trump trade’ played out for most of October as he led the way in most swing states, even with a small margin, and it was only towards the end of the month that Harris was moving up the polls. The reaction in markets, including ours, was therefore more muted this time around relative to Trump’s first victory which came as a genuine surprise.
Trump’s key appointments
It is now clear that we are faced with a Republican majority in both the Senate and Congress. As we write this, we have seen most of the appointments for key positions in the new administration which also gives us more sense of what we need to look out for – we would like to say “expect” but we need more flexibility given the likelihood of a few surprises to come.
In the weeks since the election result, the equity and fixed income markets have started to paint their own picture of likely policy direction. The market believes this will be very pro-business and pro-technology, and we tend to agree. The initial reaction across our fund range in the days after the election was for most of our technology stocks to tick upwards. India followed the same path as it was seen as the safest of havens across emerging markets with regard to Trump risk. Many, including us, would say India has the potential for additional gains and being a genuine ‘winner’ with Trump in power in the US.
We see pressure on other emerging markets, with plenty of focus on China, though again a great deal of negative sentiment was already in the price.
When we started to see some of the more aggressive policy announcements, as with the commitment to deport illegal immigrants, Trump’s policies are starting to look inflationary – the 10-year Treasury curve moved up – which signalled the usual emerging market duration risk. Since then we have seen market weakness which is where we more or less stand today.
It appears that Trump and those behind him are picking people for the key positions in the administration who are very loyal to him. We should therefore expect that with a clean sweep and strong, loyal backers inside the White House, he will be able to push his policies through.
We have recently had two key announcements, the first being Scott Bessent as the new Treasury Secretary, assuming approval by the Senate. He has strong Wall Street credentials and in the past was a great advocator for debt reduction. The mini relief rally shows at least the market approved, though we also saw the dollar weaken suggesting it thinks Bessent can better control the debt trends.
The second was something we have more or less have been waiting for with the first round of tariff increases. They were more mild than we expected, with ‘only’ a 10% additional tariff increase on goods from China on his first day in office – during his campaign he talked of much higher numbers. There were also tariff announcements for Mexico and Canda, with some seeing the Canadian tariffs as a surprise. We think the tariffs on Mexico and Canada are related to the renegotiation of their trade deal (the current NAFTA 2.0) which is soon up for renewal.
US/China relationship
From an emerging market and Asia perspective, the biggest question is how the US/China relationship will evolve under Trump as there are plenty of China hawks in the administration. It was assumed that Robert Lighthizer, one of the hawks, would be the US Trade Representative, however Trump selected his protégé Jamieson Greer. Our assumption for now is that he will follow Lighthizer’s path, as will John Ratcliffe (CIA), Mike Waltz (National Security Adviser) and Commerce Secretary Howard Lutnick, though we get the sense he will follow whatever line Trump follows. As yet, Mike Pompeo, former Director of the CIA under Trump, has not been given a role. In the past we have considered him risky as he seems to want to complicate the US/China relationship. He may yet have some form of influence from the sidelines.
Our base case is for a managed decoupling, built around our longer-term narrative for emerging markets and Asia over the coming decade and a ‘New Multipolar World’
On the more dovish side are, we believe, people like Elon Musk and Wall Street darling Bessent. They are expected to want some form of deal with China and therefore greater stability. They will almost certainly have influence, particularly Musk given the access and influence he has on Trump. However, they will likely lack the authority to make a huge impact on the US approach should others go hard on China.
To summarise, there are four scenarios for the US/China relationship. (1) A deal between the two superpowers around trade, tariffs, commitment to manufacturing in the US and so on; (2) A managed decoupling, which is pretty much what we have now, with the two drifting apart on many fronts but still inter-dependent on key trade items. This will play out over the long term, so as to not cause too much volatility; (3) an unmanaged decoupling, where any relationship breaks down very quickly the next two years or so; and (4) a direct crisis/conflict.
Our base case is for a managed decoupling, built around our longer-term narrative for emerging markets and Asia over the coming decade and a ‘New Multipolar World’. However, we do see the probability of an unmanaged decoupling having increased slightly with some of these key administration appointments. This is certainly something we will monitor closely.
The pros and the cons
From our point of view, there is one likely risk and one likely benefit of Trump as president. The risk is that many countries (and therefore companies) will likely be hit with tariff increases, potentially across the board. Hopefully, his tariff policies are merely negotiation tactics and will not be too bad in the end. We do not see manufacturing moving back to the US in a hurry so will ultimately be a direct extra tax (inflation) on the US consumer and Asian companies will likely be hit due to higher prices.
We believe India stands to be one of the big winners from Trump being elected
With this in mind, technology is a difficult sector to assess as we have been informed that key US companies, particularly NVIDIA and Tesla, need the Asian supply chain. Also, many key geopolitical hawks want to help Taiwan, or rather they want to do anything to upset China.
Technology leads me to the likely benefit. Trump will push for lower taxes and less regulation which we believe will be bullish for the large US technology companies and hyperscalers. If they have strong/stronger earnings we see a greater likelihood they will go for higher capex in their fight for AI leadership which will spill over for the South Korean and Taiwanese technology companies, a large part of the Asian investment universe.
We believe India stands to be one of the big winners from Trump being elected and on most risk and export-related models, it is forecast to be the least negatively impacted country from Trump coming to power. This is what the market has been signalling so far. We have benefited from our India exposure and have retained an overweight position, adding to our position recently as our view is India will see little impact and, given the sell off in India over the past six or seven weeks, there are a couple of good candidates likely to benefit from us adding capital.
From a medium to longer-term view, Trump carries additional risk, more directly for the US but his impact could be felt further afield, as most policies indicated so far are stagflationary, i.e. lower growth and higher inflation. Though felt harder in the US, this is a risk to all investments globally that have some form of duration risk. Furthermore, this will likely limit the Fed’s monetary (easing) cycle which, combined with tariffs and the impact on trade, will lead to a stronger dollar – at least until the rest of the world retaliates. Given Trump is trying to front-load growth, he will drive up debt levels in the US, which is likely to turn into a higher term premium in the Treasury market. None of this is long-term bullish for any asset with a duration profile.
The really big unknown is what Musk will do from inside the government. Can he bring efficiency? If he does it will be the equivalent of a positive supply shock and reduce much of the fear around inflation. We see this as a potential positive upside for the future but our base case is that we will not see a huge impact from him.
Given all this, the key question becomes ‘Is this time different?’. The last time we saw even low levels of stagflation, it hit markets like ours harder that the root of the problem, the US, which has been able to survive on its so-called exceptionalism. We bow to history but believe fundamentals are on our side. Asian equities have a good chance of becoming the new global growth engine and the anti-debt trade – this is all part of our ‘New Multipolar World’ narrative.
Outlook
The long and short of Trump’s victory is that we believe much of the risk is already priced into the market and we have seen weakness over the past six weeks or so on how Trump polls. However, whenever Trump says anything negative about China there is a risk of markets reacting the following day, even though we all know it is coming sooner or later.
On the positive side, underlying economic fundamentals – excluding China – are stacking up nicely and valuation levels are low, reflecting much of the risk already. We believe that eventually fundamentals will prevail.
It is interesting to note that over the last Trump presidency, emerging markets and Asia outperformed US small caps (as per the Russell 2000 Index) and gave a positive absolute return.
Over the past three months, we have taken some duration risk out of the portfolios and effectively only kept traditional duration risk in technology companies, given we see this as one of the few industries to see support from Trump. Furthermore, we have kept an underweight in China though there is a high risk China will expand its stimulus measures on the back of Trump winning.
Geopolitically, we see more risk to Europe than Asia in the coming period. Trump is likely to oppose any support for Ukraine meaning the Russian border will effectively shift further west.
Given all of this, we remain constructive on the outlook for emerging markets. The Fund has shown strong long-term performance and is in the top decile since inception in June 2018 as well as the past five years, according to Lipper, and we remain confident that we can continue to deliver for our investors.
