What the US election means for emerging market debt

Anthony Kettle, senior portfolio manager for emerging markets at RBC BlueBay, explains to Morningstar that the main areas that will be affected by the new configuration of Congress and the White House are:

• US Fiscal Policy: Tax and Spending Plans
• US Trade Policy: Protectionism and Tariffs
• US foreign policy: Russia and Ukraine, the Middle East and relations with NATO

“All of these elements will have an impact on the direction of interest rates and the US dollar,” explains Kettle.

“Because the two candidates are tied in the polls, it’s hard to make sure bets on who will win the election, and therefore difficult to draw firm conclusions about the direction of the US dollar.

“For rates and credit, however, we have more clarity on the direction of these asset sub-classes during the US election, given lower emerging market inflation and a healthy emerging credit default rate.”

What will happen to EM debt if US tariffs rise?

Tariffs are likely to have the most immediate impact on EM debt, particularly US dollar-denominated bonds.

“In the event of a large rate hike, there will be an appreciation in the US dollar to partially offset the impact,” explains Preston Caldwell, senior US economist at Morningstar.

“For example, a uniform 10% increase in tariffs could lead to an appreciation of the dollar of about 5%. So this is relevant for emerging market investors. For dollar debt, the depreciation of local currencies against the greenback can increase risk. implicit.”

Reza Karim, manager of emerging markets debt at Jupiter AM, lists China and Mexico, which are also among the top exporters to the United States, among the countries that could be most negatively affected. “There could, however, also be some countries ready to benefit from tougher policies against China, for example Vietnam,” Karim told Morningstar.

Karim also points out that if Trump wins, new tariffs could be imposed even without congressional approval, so a landslide Republican victory may not be strictly necessary. On the other hand, if Kamala Harris becomes president “we would expect some sort of continuity from current US policies and therefore a less direct impact on the markets.”

Ukraine, the Federal Reserve and Defaults

The future direction of US foreign policy could affect the emerging debt market either positively or negatively. For example, Morningstar’s Caldwell says the possible end of aid to Ukraine would significantly increase the country’s credit risk. Instead, Jupiter’s Karim sees the situation in Eastern Europe as having sudden developments, such as a ceasefire. The governments of Argentina and El Salvador have recently been close to Trump and thus could benefit from his victory, Karim adds.

Even as the U.S. election captures the markets’ attention, managers are urging investors not to lose sight of the most important factors moving emerging-market bonds: the Federal Reserve’s monetary policy, which is set to become less restrictive, and economic fundamentals.

(Lower US interest rates make dollar-denominated assets less attractive from an income perspective.)

Anisha A. Goodly, managing director of emerging markets at TCW, sees growth in emerging markets outpacing that of developed market economies, as well as a decreasing likelihood of defaults this year and next.

“The global growth forecast for 2024 looks broadly in line with the previous year’s forecast of 3.2%. In particular, the economic growth gap between emerging and developed markets is expected to reach the highest level in nearly a decade as some large and developed economies slow. low or struggling to recover,” says Anisha A. Goodly, managing director of emerging markets at

She adds: “More prudent macroeconomic policies have emerged, characterized by conservative fiscal management, a gradual reduction in subsidies and an increasing commitment to monetary orthodoxy through inflation targeting. Accordingly, we do not expect any sovereign defaults in 2024 and 2025. In fact, 73% of rating actions in the emerging environment this year were upgrades or changes to a positive outlook.”

Emerging debt strategies ahead of the US election

Mark Haefele, chief investment officer at UBS Global Wealth Management, said of the recent 9/11 candidate debate: “Neither candidate was particularly strong on policy, and both avoided the moderator’s questions to focus on the opponent’s weaknesses their. With the result still difficult. to predict for both the White House and Congress, investors with Asia-Pacific exposure should position themselves in November with a balanced portfolio that can withstand some political risk.”

Faced with an election outcome that remains uncertain, RBC BlueBay said it had positioned more flexible portfolios to “maintain credit and rate risk and reduce currency risk”.

Hard currency vs. Debt in local currency

Some managers distinguish between US dollars (strong currency) and emerging local currency bonds.

“In our strong currency emerging markets portfolios, we have reduced overweights to a selection of frontier sovereigns, for which further appreciation will have to depend on external factors, while we have begun to increase exposure to investment-grade sovereign bonds.” , says TCW. Good.

“In our local currency portfolios, however, we favor countries with idiosyncratic factors (such as Egypt, Turkey, Nigeria) over exposures that are more dependent on US rate policy or a general reduction in volatility.”

Because it is difficult to predict the outcome of the election, Karim explains that it is difficult to drastically change portfolios in favor of a certain scenario. “Overall, we maintain a marginally constructive stance on interest rates given the potential for more accommodative policy going forward, but prefer to have modest active rate risk.”

From a regional perspective, Jupiter finds “still quite a lot of value in relative terms in Europe and in particular some Ukrainian companies.” Africa is also of interest, with top companies from countries such as Morocco, Nigeria or South Africa offering some opportunities. Egypt’s local currency debt is also in scope.

In Latin America, Jupiter is “modestly constructive”, especially in Brazil, while being more neutral towards Mexico and Colombia. “These are positions that we might reconsider if we see a strong shift in US foreign policy, particularly on tariffs,” says Karim. He prefers “idiosyncratic local stories” in Asia. “India and Macau are good examples of where to find value today in sectors like renewable energy, TMT (technology, media and communications) and gaming.”