Trump’s red wave pushes emerging market stocks to a two-month low: Volatility is expected to remain high
Emerging market stocks have fallen to levels last seen in mid-September, with the downturn exacerbated by Donald Trump‘s victory and a Republican victory in the United States Congress.
The iShares MSCI Emerging Markets ETF (NYSE:EEM) is down 7% over the past month, with the iShares MSCI China ETF (NYSE:MCHI) and the iShares Mexico ETF (NYSE:EWW) underperformed – down 10.1% and 7.8% respectively.
Trump’s victory and full Republican control of Washington, DC raise critical questions for emerging markets (EM). What do more protectionist US policies and potential fiscal easing mean for emerging economies, currencies and credit conditions?
Why are emerging markets falling?
Trump’s election has raised concerns about possible shifts in US fiscal and trade policies that could have a domino effect on global markets.
“The prospects of looser fiscal policy and more trade protectionism have pushed up US short- and long-term interest rates, putting upward pressure on borrowing costs in emerging markets,” he said. Elijah Oliveros-Rosenchief economist of emerging markets S&P Global Ratings.
Higher U.S. interest rates tend to strengthen the dollar, making it more expensive for emerging markets to service dollar-denominated debt. This tightening financial environment is already starting to impact emerging market currencies, which have weakened against the dollar across the board.
Currency devaluation in emerging markets: a major problem
Following Trump’s victory, most emerging market currencies – especially in Central and Eastern Europe and Latin America – have depreciated significantly against the US dollar.
Investors fear the Federal Reserve will delay interest rate cuts in response to Trump’s policies, which could include new tariffs or stricter immigration rules. A stronger dollar and potential trade barriers pose serious risks for emerging economies that rely on exports and foreign investment.
The Mexican peso in particular has been hit hard by Trump’s election, as uncertainty over trade and immigration policies towards Mexico has made investors wary.
Private fixed investment in Mexico, which has been strong over the past two years due to nearshoring, could lose steam until there is more clarity on U.S. policy.
“During the 2016-2020 Trump administration (excluding the pandemic), private fixed investment in Mexico fell 4.5%,” S&P Global wrote in a report.
Tightening financial conditions for emerging markets
The rise in US interest rates is tightening financial conditions for emerging countries, which are highly dependent on affordable credit to finance growth.
As borrowing costs rise, fiscal vulnerabilities in these markets may become more apparent, potentially limiting governments’ ability to stimulate their economies.
“Volatility in emerging market assets is expected to remain high for some time due to uncertainties surrounding US policy details, including the trade, fiscal and regulatory environment,” Oliveros-Rosen said.
Investors are likely to remain tense until the new administration clarifies its approach, especially on trade.
Impact on credit ratings, market activity
The tightening financial environment is already having an impact on the credit ratings of emerging markets.
While the number of issuers rated ‘CCC+’ or lower has declined slightly, indicating some deleveraging, many emerging market companies are still highly indebted. Riskier credits have been able to refinance for the first time since November 2021, but this could come at the cost of lower capital expenditure in 2025-2026.
Corporate bond spreads in emerging markets remain tight, supporting robust market activity for speculative issuers. With two months to go in 2024, all emerging regions – except Asia – have already surpassed their average bond issuance volumes of the past seven years. Both benchmark and corporate bond yields have risen amid uncertainty, reflecting more cautious investor sentiment.
Long-term outlook: headwinds, opportunities
Looking ahead, emerging markets have mixed prospects. In the near term, volatility in emerging market assets is expected to remain high for some time due to uncertainties surrounding US policy details, including the trade, fiscal and regulatory environment, S&P Global writes.
Still, demographics, technology and the global energy transition could provide structural growth tailwinds over the next decade, potentially offsetting some of the risks of a protectionist U.S. stance.
Supply chain shifts and nearshoring trends, especially in regions such as Latin America, could also help some emerging countries attract investment.
As Oliveros-Rosen stated, “The specific policies announced by the next US administration could further strengthen or reverse the recent tightening of financial conditions, with implications for emerging market growth and credit conditions.”
In other words, the ball is in Washington’s court. Whether emerging countries face a full-blown crisis or simply an adjustment period will largely depend on Trump’s policy choices in 2025.
Read next:
Photo: Shutterstock
Next: Transform your trading with Benzinga Edge’s unique market trading ideas and tools. Click now to access unique insights which can give you an edge in today’s competitive market.
Want the latest stock analysis from Benzinga?
This article Trump’s Red Wave Pushes Emerging Market Stocks to Two-Month Low: Volatility Expected to Remain High originally appeared on Benzinga.com
