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EMD in a Trump 2.0 World

Donald Trump’s and the Republican party’s sweeping victories in November signal a strong mandate for meaningful change that will influence the global economy and geopolitics for 2025 and beyond. While exact details of Trump’s policies remain unknown, the former president has made the direction of political change clear in several key areas:

• Trade: Trump has consistently pledged to implement tariffs as a central element of his trade strategy, particularly targeting China. This could lead to an escalation in trade tensions and further tariffs, potentially impacting global supply chains and emerging markets reliant on exports to the US.
• Immigration: Restricting immigration is another pillar of Trump’s agenda, which could have economic implications for industries dependent on migrant labor, potentially leading to higher wage pressures and supply-side constraints domestically, while reducing remittance flows to some emerging markets.
• Fiscal Policies: Trump is likely to maintain a pro-cyclical fiscal stance, as he did in his first term. His main tax proposal seeks to reduce corporate tax rates for domestically produced goods.
• Deregulation: Trump’s administration is expected to continue removing regulatory barriers, especially in sectors such as energy, finance and manufacturing. He also plans to create a government efficiency commission to streamline operations and reduce federal oversight. This could lead to stronger US growth but also contribute to higher inflation and interest rates, creating headwinds for emerging markets debt.

As always, country fundamentals remain our primary focus:

ASIA

Tariffs: Trump’s planned tariffs targeting China could trigger a significant growth shock in the country, with mixed effects on other Asian economies linked through trade. Countries receiving substantial Chinese FDI, such as Vietnam, Thailand, Malaysia, Japan, and South Korea, may also face direct tariffs under Trump 2.0.

Currency Dynamics: Potential for CNH weakness in order to maintain competitiveness, which could ripple through regional currencies, including the Japanese Yen and Korean Won.

Re-shoring Opportunities: Southeast Asian nations like Vietnam, Malaysia, and Thailand may attract FDI from re-shoring, boosting long-term growth, though short-term impacts are limited.

LATIN AMERICA

• Re-shoring Opportunities: Trump’s promised tariffs seeking to target China are expected to re-orient production from China to Latin America.
  • We expect countries that are currently led by center right or right governments will benefit the most from this increased collaboration with the US. This includes: Ecuador, El Salvador, Argentina, Paraguay, Dominican Republic, Peru, Guyana, Costa Rica.
  • On the other hand, countries like Venezuela, Colombia, Cuba, Nicaragua and Honduras may face intensified pressure campaigns from the Trump administration for regime changes or leadership shifts.
• Mexico: Successfully navigated Trump 1.0, benefiting from the US-China trade war and strong ties between Trump and former President AMLO. Under Trump 2.0, challenges could arise from potential tariffs tied to border issues, uncertainty regarding President Sheinbaum’s relationship with Trump and the review of the USMCA.
• Immigration and Remittances: A potential mass wave of deportations could negatively impact countries like Honduras, Guatemala and El Salvador who do not have the infrastructure to receive these immigrants. Additionally, remittances account for significant portions of GDP, raising concerns about social and economic stability.

MIDDLE EAST & NORTH AFRICA

US Aid & Collaboration: Trump 2.0 is expected to bolster financial and military support for key allies while reducing aid or disengaging from nations with divergent policies. Trump will want to trade increased financial & military transactions for quiet in the region.

• Israel: Likely to benefit significantly through increased military aid, trade ties, and geopolitical backing.
• Saudi Arabia: Strong Trump ties could enhance relations, with potential for a Saudi-Israel deal. Challenges include Saudi-China investments, BRICS considerations, and the negative impact of Trump’s oil price reduction goals on Saudi’s fiscal health.
• Turkey: Relations likely to remain mixed, marked by past tensions (e.g., Kurdish issues, Russian missile systems) but less focus from Trump on contentious topics. Recent efforts to repair ties with the West may shift dynamics, though both leaders are known for unpredictability.

CENTRAL & EASTERN EUROPE

Geopolitical relations will be the main area impacted by a Trump administration in Central and Eastern European (CEE) countries.

Ukraine: Trump aims to end the Russia-Ukraine war, though his methods remain vague. While unlikely, US support for Ukraine could wane. Trump is expected to prioritize U.S. interests, potentially shifting more of the burden to Western Europe.

Hungary: PM Orban boasts strong ties with Trump, who has praised him in return. However, Orban’s relationships with China and Russia may complicate US-Hungary dynamics under the new administration.

AFRICA

Some may think Africa will be relegated to an afterthought for the incoming US administration, but we should note that some helpful policy came from the previous Trump years. The transformation of OPIC to DFC precipitated an increased funding envelope for African countries, and while free trade agreements aren’t generally viewed as a signature Trump initiative, the previous administration started work on an FTA with Kenya. That said, with geopolitical lines expected to be drawn more starkly, individual countries may soon be asked to choose sides between the US and China, at risk of ire from DC.

Oil Production – Potential Strain on Major Producers:  If Trump boosts US oil productions, it could strain the fiscal and external balances of major producers in the region, including Gabon, Ghana, Senegal, Nigeria and Angola.

 

The timing and scope of these policy shifts remain uncertain, and this ambiguity is likely to persist. However, such uncertainty within the asset class can also create investment opportunities. We will continue to closely track these developments as they evolve, assessing their impact on the emerging markets debt space.

 

For more detail, please reach out to your Artisan representative for a copy of our December 2024 Year-End Deck: Into the Great Unknown