The results of the american elections they could have a profound impact on emerging markets (ME), with trade tensions and currency adjustments shaping the outlook, according to a recent report from Bank of America (BofA).
One of the main concerns is the possibility that The trade war between the US and China is revived. “If the Trade tensions intensify in the short term, “We are likely to see fund outflows from emerging markets,” warn BofA strategists David Hauner and Claudio Piron.
How investors positioned themselves prior to the results of the US elections
Analysts also highlight that many investors have not yet clearly positioned themselves.
“Our clients told us that they were driving very low risk levelsbut that they had not yet prepared for a trade war scenario,” they indicated. Instead, most adopted trading strategies focused on selling the rises in the US dollar and buy the dips in emerging currencies.
The implications of a trade war scenario for emerging market fundamentals “should be taken very seriously,” the strategists emphasize, adding that “even conservative assumptions on tariffs” could have a significant impact on emerging market equilibrium exchange rates.
This scenario is particularly relevant for Europe and Northeast Asia, where limited fiscal capacity restricts economic stimulus options. In more fiscally vulnerable countries, such as Brazil, a stronger dollar and rising interest rates could create additional tensions.
The rise of the dollar will have a full impact on emerging markets
The team of Bank of America notes that the US dollar could see “significant appreciation” against emerging market currencies, which would increase pressure on interest rates and external debt spreads.
“Markets that are more open to trading are likely to perform worse,” the strategists noted. “Rates should end up falling, as the impact of growth will prevail over currency fluctuations, although it is still premature to expect the bullish movement to deflate.”
Nevertheless, BofA identifies potential opportunities in markets with fiscal credibility and solid inflationwhere rate cuts could prove beneficial as growth challenges begin to overshadow currency pressures.
In emerging Asian markets, much of the future depends on China’s response. Chinese authorities are expected to prioritize currency stability, especially if the USD/CNH pair rises above 7.30. However, Bank of America warns that “this political tension could dampen a potential rally in equities unless there is a robust fiscal impulse.”
China’s response to possible tariffs will be key, setting the tone for other Asian economies and affecting their monetary and trade policies.
What will happen to China after Donald Trump’s victory
For the Asia’s smallest, most open economies A US protectionist policy could create challenges on two fronts: reduced trade volumes and inflationary pressures from tariffs. This could disrupt easing cycles in countries such as Korea, Indonesia and Thailand. Ironically, US tariffs could trigger a disinflation throughout Asia, as China would redirect its exports to other emerging markets. This would cause “further monetary tension, as Asian central banks would be pressured to cut rates as exports and inflation decline, but the USD remains strong.”
In generalBofA forecasts that Northeast Asian currencies, such as the yuan, won and Taiwanese dollar, could perform worse than their Southeast Asian counterparts. One exception is the Singapore dollar, which has maintained its strength thanks to policy credibility and investment inflows, although it could weaken if global protectionism persists.
Source: Ambito
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