(News Bulletin 247) – A strong dollar and the prospect of customs measures in the United States weighed on the bond and currency markets of certain emerging countries. Argentina and India, on the other hand, could benefit from the return of Donald Trump to the White House.

The hypothesis of a “Goldilocks” environment hoped for in 2025 for emerging markets after years of interest rate hikes now seems greatly threatened by the imminent return of Donald Trump to the White House.

The strength of the dollar, the prospect of an increase in customs duties in the United States, possible unfunded public spending and a possible slowdown in the pace of the reduction in key rates by the American Federal Reserve (Fed) have recently affected several emerging market currencies and weighed on certain government bonds.

Uncertainties for 2025

This has led investors to re-examine the impact of Donald Trump’s policies on developing country assets. “Even though we have been positive on emerging market assets this year and even though performance has been strong, we need to think about next year and position ourselves more cautiously, both in local and hard currencies.” , said Yerlan Syzdykov, global head of emerging markets at Amundi, Europe’s leading asset manager.

The prospect in the United States of a “red wave” – ​​with the Republicans also taking control of the House of Representatives, in addition to the presidency and the Senate – would be a “element which would change the situation somewhat”, a- he added.

Investment flows to emerging markets have rebounded after difficult years marked by low risk appetite due to the 2020 Covid-19 pandemic.

During this period, also characterized by an increase in key rates from central banks around the world, investors chose to keep their funds in assets in developed countries, considered safer.

Net inflows into stocks and bonds from developing economies, which had fallen to virtually zero in 2022, rebounded to just under $250 billion from September 2024 figures, according to Institute data. of International Finance. In 2023, they had represented 177 billion dollars.

“Before the election, there was a lot of optimism around emerging markets,” said Anders Faergemann, portfolio manager at PineBridge Investments, noting that growth differentials in emerging markets compared to the developed world are at their highest. for ten years.

A situation reminiscent of the year 2016

JPMorgan’s Emerging Markets Hard Currency Bond Index, used to gauge the performance of bond investments, has returned about 6% year to date, while local government bonds have , are standing still.

This situation is somewhat reminiscent of 2016, when the local currency of emerging markets suffered from the surprise victory of Donald Trump in the elections, explains Allianz Global Investors in a note to its clients.

According to Anders Faergemann, Donald Trump’s victory now puts China and emerging market currencies under pressure. The Polish zloty and the Hungarian forint, which have fallen to their lowest level in two years, are, he says, in danger because of the two countries’ dependence on trade and the risk linked to tariffs that Donald Trump wants to impose.

The Mexican peso, considered a benchmark among emerging market currencies, fell 3.6% this week after the announcement of Donald Trump’s victory, before quickly erasing its losses. The decline of the peso is nevertheless less marked than that recorded in 2016, when it lost 8%.

Many market observers are closely watching the first signs on the spending promises by Donald Trump and the impact this could have on the trajectory of the Fed’s key rates, knowing that an increase in the budget deficit could lead to a pace slower rate decline.

“Higher rates and a strong US dollar are an obstacle… (as are) some of the proposed policies like tariffs,” said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income.

Countries that could benefit from a Trump victory

A certain optimism remains, however. Countries like India could benefit from Donald Trump’s tough approach to China, says Amundi’s Yerlan Syzdykov, while Argentina is also expected to attract investors with its reform and tariff reduction agenda. expenses.

“Certain sectors and countries could benefit from a Trump victory,” said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management.

“A portfolio in emerging markets can generate a lot of value,” she said. Significant changes in the geopolitical context could also create a new situation. International bonds and Ukrainian Treasury bonds rose sharply after Donald Trump’s victory, amid optimism about a possible end to the conflict between Moscow and Kyiv.

Argentine stocks and bonds also rose, with investors anticipating closer ties with the United States, with Donald Trump considered close to Argentine libertarian President Javier Milei.

Bankers had hoped the year-to-date jump in debt issuance could continue into 2025. But some now fear volatility before and after Donald Trump’s inauguration in January – traditionally a big issuance month – could have an impact on emissions on the primary market. Barclays estimates that international emerging market sovereign bond sales will reach a maximum of $160 billion this year, and around $130 billion next year.

The high cost of debt could further limit emerging markets’ access to liquidity, already a major concern for bodies like the International Monetary Fund (IMF).

Still, investors say the fear, market swings and risk aversion that followed Donald Trump’s 2016 victory are less likely this time around. This means that developing countries and their assets retain some potential to continue attracting capital.

“We’ve already seen Trump, so we’ve already seen this movie – and we survived,” sums up Amundi’s Yerlan Syzdykov.

(With Reuters)