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Executive summary │ Emerging markets and Trump 2.0
Navigating tectonic shifts that's ushering a new economic paradigm
Tectonic shifts under Trump 2.0
Implications for emerging markets under the new economic paradigm
- Trump 2.0 is heralding a paradigm shift in the global world order. Tariffs are the common denominator. The disruption to trade are far-reaching. Unlike Trump 1.0, the impact this time is more swift and more severe.
- As the policy agenda under Trump 2.0 becomes more discernible, policy reactions are being stepped up to navigate the reconfiguration of global trade with seismic reverberations for global markets
- Big picture – global recession risks following “Liberation Day” on 2 April have manifestly increased, with the tariff schedule announced fanning the flames of a significant escalation in global trade war fears. If sustained, it threatens to (permanently) impair the rules-based global trading system – we acknowledge that President Trump’s 11th hour “art of the delay” announcement of a 90 day pause on the additional country-specific portion of the “reciprocal” tariffs on 9 April (bar China) eases the most extreme recessionary risks.
- What is clear is that the first order impact of tariffs is akin to a negative supply shock for the US – driving inflation higher and a negative real income squeeze for consumers. For trade partners, it is akin to a negative external demand shock – driving weaker exports and putting downward pressure on domestic inflation in the tradables sector.
- In this thought leadership report, we offer an examination of how emerging markets (EM) may navigate the more assertive Trump 2.0 “power-based” doctrine, highlighting that we are not making immediate wholesale changes to our EM forecasts as we want to dust to settle after the initial implementation and negotiation process takes hold:
- Trade. EMs comprise the largest trade surplus with the US on an aggregate basis, which puts it in a challenging position in navigating US policy – with “factory Asia” most at risk.
- Defence. The rewiring of the global security architecture, led by the US’s more bellicose foreign policy strategy, has raised reservations on the support and costs of the US security guarantee. Israel, Turkey, Czech Republic, Poland and South Korea may benefit from heightened demand for military hardware.
- US de-risking. US policy centred on what some dub, “sticks / threats” to extract concessions, while reneging on prior agreements, hampers trust. EMs, notably the BRICS+ that are gaining in economic heft, may increasingly question the risk-adjusted returns of conserving the status quo with the US.
- EMs during recessions. The spectre of a tariff escalatory spiral has brusquely raised the probability of a global recession. We see EM credit spreads widening further, while EM rates typically bifurcate in recessionary episodes – low yielders see yields decline (like DMs), and high yielders see higher yields (like a credit asset class).
- Where to play to win (and hide). The list of EMs is not long, in our view. The well-positioned defensive Middle East investment grade economies and Chile are sound macro narratives in this setting. Egypt, Israel, Philippines and Turkey are most trade insulated. Larger EMs – Argentina, Brazil and India – fairly closed with some vital as a counter to China, may better contain trade strains through US negotiations.
- Looking ahead, we should not underestimate the opacity of the Trump’s administration’s approach, with concerns surrounding partial autarky posing as a (persistent) barrier to investor confidence in the EM complex. Whatever hope there may be for the spectre of future negotiations that may lead to some degree of de-escalation, the damage from the US’s “might makes right” policy calibration may prove long-lasting.
- Once the dust settles, we sense that a much bigger and potentially multi-year theme may transpire – a rotation out of US financial assets to “rest of the world” assets, with EMs central to this global capital reallocation.
