How the US Election Could Affect Emerging Markets By Investing.com

Investing.com — The US presidential election is a major event affecting global financial markets, with its influence reaching far beyond US borders into emerging market (EM) economies.

As the world’s largest economy, the US shapes global financial conditions through its growth, trade and international relations policies.

UBS analysts outlined several ways the 2024 election could affect emerging markets, particularly through changes in the US macroeconomic landscape, trade strategies and geopolitical relations.

Emerging market assets are closely linked to expectations about the US economy. Factors such as GDP growth, inflation, interest rates and the strength of the US dollar could change depending on the outcome of the election.

For example, a Republican victory may lead to stronger US economic growth, but it may also bring higher inflation and interest rates. These conditions may initially strengthen the US dollar, but this may pose challenges for emerging markets.

Historically, a stronger dollar raises the cost of borrowing for emerging countries, many of which have significant dollar debt. This tightening of financial conditions could discourage foreign investment and slow economic growth in these markets.

Historically, emerging market assets have seen short-term ups and downs around US elections due to uncertainty about changes in US leadership. The value of the dollar, which is a major factor, is particularly important.

“The US dollar represents almost 60% of global currency reserves. And the country boasts the largest and deepest capital markets in the world,” analysts at UBS said in a note.

While stronger US growth could fuel demand for goods and services in emerging markets, higher interest rates and a rising dollar could create financial headwinds, limiting the potential for increased investor interest.

Trade policy is another critical channel through which the US election could affect emerging markets. US presidents have considerable power to shape the country’s trade relations, and tariffs have become a prominent policy tool in recent years.

A Republican administration, especially under Trump, could revive high-tariff strategies, which could increase uncertainty and reduce the attractiveness of emerging market assets, particularly in export-led economies such as Mexico and several Asian nations.

On the other hand, a Democratic administration could favor more multilateral trade policies, potentially reducing trade tensions and giving emerging economies more stable access to global markets.

Geopolitics is another area of ​​significant concern. US relations with key global players such as China, Mexico, Argentina, Venezuela and Russia could evolve considerably depending on who wins the presidency.

“Former President Trump has repeatedly expressed his preference to actively use tariffs as a trade policy tool and appears to be taking a more unilateral and isolationist approach to addressing cross-border issues, analysts said, raising the stakes for emerging markets, especially for those that depend on stable trade and diplomatic relations with the U.S. In Latin America, for example, Mexico could experience increased volatility depending on changes in U.S. immigration or trade policies.

However, Argentina could benefit from its president’s strong ties to Trump, which could lead to improved bilateral relations.

In Asia, the effects of the election are likely to be complex, offering both risks and opportunities. US-China relations, already on a tense and strained trajectory, are expected to remain challenging regardless of the outcome of the election.

Further restrictions on Chinese technology companies are possible, prompting global investors to shift their focus to other markets such as Taiwan and South Korea, which are home to world-class memory and semiconductor suppliers.

India, with its growing role in global supply chains as companies seek alternatives to China, is poised to attract even more investment interest from US and international firms.

Meanwhile, in the Middle East and Central and Eastern Europe, the outcome of the election could have a profound effect on the geopolitical landscape.

A Republican victory would lead to an increase in US fossil fuel production, which could lower international oil prices and put further competitive pressure on Gulf exporters.

“A Trump presidency would likely lead to a sharp reduction in financial and military support for Ukraine and a weakening of NATO, which would increase the geopolitical risk premium for European assets,” the analysts said.