How to Invest in Emerging Market Equities as New US Policies Bite

Emerging markets (EM) face challenges from President Trump's policy plans, with potential tariffs and currency issues posing risks. However, these challenges could also present opportunities for discerning investors. Despite initial negative sentiment, EM stocks have shown resilience, with past performance during Trump's first term being relatively strong. The current low valuations of EM equities may already reflect anticipated difficulties, yet they hold promise due to higher earnings growth forecasts compared to developed markets.

Chinese exports have remained robust despite tariffs, highlighting the adaptability of Chinese companies in reconfiguring supply chains. Additionally, not all manufacturing is expected to return to the US, suggesting that certain EM sectors may continue to thrive. Countries like India, Vietnam, and Mexico might benefit from US tariffs, offering new investment avenues.

Potential Chinese stimulus could further bolster EM stocks, as past fiscal measures have positively impacted markets. While China holds significant weight in the EM index, it's crucial to consider the diverse range of EM countries and companies beyond China, which may be less affected by US-China trade tensions. Active investors can find alpha in EM by focusing on companies with competitive advantages and those less reliant on the US market.

In summary, while EM markets face policy risks, they remain a fertile ground for selective investment. A disciplined approach that integrates policy-risk analysis and focuses on high-quality businesses can help investors navigate challenges and achieve strong long-term results.