The US presidential election is a major event affecting global financial markets, with its influence reaching far beyond US borders to emerging market (EM) economies. Therefore lets see how the US Election can affect these emerging markets.
As the world’s largest economy, the US shapes global financial conditions through its policies on growth, trade and international relations.
UBS analysts have outlined several ways the 2024 election could affect emerging markets, particularly through changes in the US macroeconomic landscape, trade strategies and geopolitical relationships.
Emerging market assets are closely linked to expectations surrounding 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 in the US Election could lead to stronger US economic growth, but also higher inflation and interest rates. These conditions could initially strengthen the US dollar, but this could create challenges for emerging markets.
Historically, a stronger dollar raises borrowing costs for emerging economies, many of which have significant dollar debt. This tightening of financial conditions could deter 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 an important factor, is particularly important.
“The US dollar accounts for nearly 60% of the world’s foreign exchange reserves. And the country has the largest and deepest capital markets in the world,” UBS analysts said in a note.
While stronger US growth could fuel demand for goods and services from emerging markets, higher interest rates and a rising dollar could create economic headwinds, limiting the potential for increased investment interest.
Trade policy is another critical channel through which the US election could affect emerging markets. US presidents have significant power to shape the country’s trade relations, and tariffs have become an important policy tool in recent years.
A Republican administration, especially under Trump, may revive strategies with heavy tariffs, which could increase uncertainty and reduce the attractiveness of emerging market assets, especially in export-driven economies such as Mexico and several Asian countries.
On the other hand, a democratic administration could favor more multilateral trade policies, potentially reducing trade tensions and offering emerging economies more stable access to global markets.
Geopolitics is another area of major concern. US relations with key global players such as China, Mexico, Argentina, Venezuela and Russia could evolve significantly 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 likely to take a more unilateral and isolationist approach to dealing with cross-border issues,” analysts said, raising the stakes for emerging markets, especially those dependent on stable trade and diplomatic relations with the US. in Latin America, for example, Mexico could see increased volatility depending on changes in US immigration or trade policies.
However, Argentina may benefit from its president’s strong ties to Trump, which could lead to improved bilateral relations.
In Asia, the implications of the election are likely to be complex, offering both risks and opportunities. US-China relations, already on a strained and strained trajectory, are expected to remain difficult regardless of the outcome of the election.
Further restrictions on Chinese tech companies are likely, prompting global investors to turn their attention 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 further investment interest from both US and international companies.
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 in the US Election would lead to an increase in US fossil fuel production, which could depress international oil prices and put additional competitive pressure on Gulf exporters.
“A Trump presidency would also likely lead to a sharp reduction in economic and military support to Ukraine and a weakened NATO, which would increase the geopolitical risk premium for European assets,” the analysts said.
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Written by D Fernando
