Emerging Markets Insights: US election outcome and emerging markets

The recent US presidential election, resulting in Donald Trump's victory, introduces a period of uncertainty for global markets, especially for emerging markets (EMs) like China. Trump's proposed tariffs, including a potential 60% on Chinese imports, could significantly impact Chinese exports and economic growth. This situation creates an overhang for equity markets and could lead to other countries increasing tariffs on EM imports as well.

The potential repeal of the US Inflation Reduction Act poses risks to South Korean automobile and battery exporters, as many battery packs used in US vehicles are imported from Asia. Additionally, Mexican auto imports could be affected by higher tariffs, given the close linkage between US and Mexican auto-supply chains. The strength of the US dollar, driven by expectations of an improved economic outlook, may also negatively impact EMs, which typically perform better in a weaker dollar environment.

In October 2024, EM equities experienced a downturn, with the MSCI EM Index returning -4.32%. Chinese equities suffered from weak economic data, while Indian equities faced challenges due to moderating corporate earnings and regulatory changes. Conversely, Taiwanese equities saw gains, driven by strong performance from the world's largest contract chipmaker. In South Korea, interest rate cuts and slight GDP growth were noted, while geopolitical tensions affected the Middle East markets.

Emerging Europe, the Middle East, and Africa regions also saw declines, with geopolitical tensions impacting investor sentiment. Meanwhile, in Latin America, higher-than-expected inflation in Brazil and Mexico, along with Brazil's challenging fiscal outlook, weighed on equities. Investors in Brazil favored fixed-income securities due to their potential for higher returns amidst prolonged high-interest rates. Overall, the current global economic and political landscape necessitates a cautious approach to investment, with a focus on company fundamentals and geopolitical developments.