Opportunities and Challenges of Trump 2.0

Trump 2.0 has significant implications for financial markets and the global economy. Until the pandemic hit, Donald Trump’s first term in office was characterized by reasonably solid economic growth, market volatility and protectionist policies. The difference in 2025 compared with 2016 will be that the Trump administration will be operating in a contrasting environment, one of lingering inflation, higher interest rates and a strong U.S. dollar. 

Trump’s election victory was initially very positive for developed markets. In contrast, emerging markets reacted negatively. We saw the dollar strengthen, 10-year bond yields rise and U.S. stocks, particular small caps, surge as investors viewed Trump’s pro-growth agenda of tax cuts and deregulation in a positive light. Trump’s plans also stirred concern that they could increase the federal budget deficit, spur inflation and keep rates higher—a big headwind for emerging markets. But this sentiment and these trades subsided as time passed and the markets wrestled with how Trump 2.0 will actually play out.

If President-elect Trump does push forward on his campaign pledges of tax cuts, tariffs, de-regulation and reducing immigration, it could, in our view, exacerbate macro headwinds across economies including emerging markets. Equally, it could also create opportunities.

While it’s too early to talk specifics, we can at least consider the potential impact on emerging markets of the expected positions of a Trump 2.0 administration.

Macro Moves

Looking through a macro lens to begin with, tax cuts, increased spending and hikes on import duties are all potentially inflationary policies. If these policies lead to higher inflation, the Federal Reserve may respond with tighter monetary policy which would be detrimental to emerging markets reliant on external financing. Higher interest rates can also strengthen the dollar which can drain liquidity from overseas markets as capital flows back to higher-yielding U.S. assets. The prospect of prolonged dollar strength and elevated U.S. rates could then lead to volatility in emerging markets currencies and debt markets.

On the flip side, Trump’s pro-growth agenda has the potential to be a tailwind across economies. Lighter regulation is generally good for financial services and that can percolate across emerging markets. Tax cuts are also good for earnings and for overseas companies that are in the U.S. They can also boost consumer spending and corporate profits, leading to increased demand for goods and services from emerging markets. Trump also wants a weaker dollar. Now this may be a big ask given that his plans, as they are laid out, are quite dollar strong. But a weaker dollar is a very strong tailwind for emerging markets.

The global macro landscape that will be shaped by Trump 2.0 will take time to emerge but at this moment we would say it is not a given that it will be an absolute headwind.

Trade Winds

The other expected development under Trump 2.0 is tariff hikes and, among emerging markets, China is in the new administration’s sights for a second time. In the first Trump administration, tariffs of up to 25% were put in place on more than US$300 billion of Chinese imports and the Biden administration has largely kept them there. This time around, Trump has floated plans to levy duties of 60% on imports from China and 20% on imports from the rest of the world.¹

If applied with a blanket approach, these duties would unquestionably hurt China’s economy. However, such an approach is doubtful, in our view. It’s difficult to know the degree to which tariffs will be used as a bargaining tool in trade negotiations with China and other markets rather than implemented as duties. It’s also probably reasonable to assume that the Trump administration will be careful in how it calibrates and targets tariffs given that a number of high-profile U.S. companies like Tesla and Apple have manufacturing hubs in China and are trying to expand their consumer markets there.

China has also managed U.S. tariffs before. As a result, it and other economies have adjusted their supply chains and diversified their trade partnerships. Perhaps more significantly, China’s economy has changed since 2016. Its share of U.S. imports has fallen from a high of 21% when Trump was elected, to 14% in 2023, partly as China has maneuvered to mitigate the costs of tariffs and focused more on growing its domestic economy.¹

So overall, the impact of tariff hikes will not be a singular one or clearly measurable in our view, and their impact on China and other emerging markets will be different to their impact in Trump 1.0.

We also believe that prospects for China’s economy and its markets will be shaped more by the success or otherwise of the Chinese government’s plans to address the structural problems of its real estate sector which has hammered the country’s consumer confidence and hindered economic growth. The stimulus and funding plans that have been announced by China's leadership in the period since September have been encouraging in our view. It’s now about the execution of those plans and it’s a long road ahead. 

“We believe that China’s prospects will be shaped more by the success or otherwise of its government’s plans to address structural problems in its real estate sector which has hammered consumer confidence and hindered economic growth.”
Sean Taylor, CIO

A Wider EM Perspective

For other emerging markets, the impact of Trump 2.0 may be less acute and may be more related to the evolving macro environment influenced by U.S. policy. India, for example, does not have the same trade conflicts and geopolitical tensions with the U.S. as China does. Additionally, while it has a large export market which is impacted by global interest rates and currency movements, the key for India’s growth is the buildout of its infrastructure, financial penetration, wage growth and consumption. It’s very domestically driven. 

Elsewhere, Taiwan and South Korea are heavily integrated into the global technology supply chain. These markets could face headwinds if the Trump administration starts tariff offenses with multiple nations. However, we believe Taiwan, in particular, is likely to benefit from continued capital investment by large U.S. tech firms into the artificial intelligence (AI) space. South Korea is a very open economy. The global auto and electric vehicle (EV) industry, in which South Korea is a big player, is very challenged and the country’s economy could face difficult times if the industry becomes subject to tariffs and trade restrictions by regional trading blocs. 

Southeast Asian markets are also very much plugged into global trade and manufacturing and like North Asia would be hindered by higher interest rates and a strong dollar. But generally speaking, we are seeing economic growth across these markets strengthen, anchored to an extent by Singapore which is a relatively resilient market thanks to its strong banking sector and economic management. We also think Vietnam is a structurally great growth story as more Asia companies, particularly from China and South Korea, locate manufacturing hubs there. However, we are mindful that Vietnam could start to be seen as a China proxy by the Trump administration given the inward appeal it has for Chinese companies.

Among Latin American markets, Mexico is the U.S.’s biggest trading partner but it potentially faces significant challenges from a second Trump administration. European companies, and increasingly Chinese companies, are setting up manufacturing and assembly hubs in Mexico to gain proximity to their end markets in the U.S. and in some cases to circumvent existing tariff regulations. Compounding Mexico’s headwinds are the sweeping reforms of its new government which are raising concerns about their potential impact on the private sector.

Our Thinking: Active Management and Portfolio Positioning

A Trump 2.0 administration presents a complex mix of challenges and opportunities for emerging markets, in our view. While a stronger dollar and protectionist trade policies could create headwinds, the resilience of emerging markets driven by domestic growth, technology and diversification, remains strong.

We believe it is important to keep two things in mind: one, the possibility that not all of Trump’s proposals are executed to the letter; and two, many emerging markets are more in charge than ever of their own growth destinies and are supported by diverse internal growth agendas rather than global trade.

Given the uncertainties surrounding a second Trump administration, we believe a cautious yet opportunistic investment approach is advisable, focusing on markets with robust domestic fundamentals and sectors poised for growth. One of the strengths of emerging markets is that there is often always somewhere to invest but an investment process is key—one that is country-aware and focused on good companies.

By navigating uncertainties with a balanced portfolio, we believe there are significant opportunities to be found in the evolving landscape of emerging markets under a Trump 2.0 administration.

Three Drivers of Emerging Markets

We are also optimistic about the long-term prospects for emerging markets. One of the key reasons for this optimism is the post-COVID growth recovery in these markets, driven in part by improved corporate governance and higher earnings growth. Our thesis is supported by three factors:

1. Post-COVID recovery: Emerging markets, particularly in Asia, have demonstrated a robust economic recovery, supported by domestic demand and improved corporate earnings.
2. Weaker U.S. dollar prospects: Although the Trump administration’s plans may initially strengthen the U.S. dollar, its policies could eventually lead to a weaker dollar especially if it pursues a strategy aimed at boosting U.S. exports. A weaker dollar would be a boon for emerging markets, making their exports more competitive and easing debt repayment pressures.
3. China's cyclical upswing: China’s potential economic recovery, supported by policy measures and domestic demand, may present a significant tailwind for emerging markets. The country's focus on self-reliance and domestic consumption may shape the long-term investment opportunity in China and in the nearer term, it may help mitigate the impact of hikes in U.S. import duties.

Sean Taylor 
Chief Investment Officer

¹Source: Bloomberg