We believe Donald Trump’s return to the White House is an opportune moment to take stock of what we’ve learned as emerging markets investors during his first term. Events could unfold in a different direction than markets currently assume, given President Trump’s inherent unpredictability, but we believe that revisiting the outcomes of his first administration can help prepare for the unexpected.
Counterintuitively perhaps, emerging markets (EM) posted positive results under President Trump’s first term, achieving 13.6% annualised growth compared to 14.0% for the MSCI World Index.1 While this positive scenario may not repeat itself, several factors give us cause to be constructive over the longer term, notably:
- After strengthening initially, the USD declined, providing key support to EM outperformance. Today, the combination of higher tariffs, export controls and deportation policies that Trump advocates is likely to fuel inflation, which could result in higher interest rates and a stronger currency. However, these proposed measures are also in conflict with Trump’s wish to close the US’s trade deficit with key trading partners which would require a more attractive USD exchange rate. Resolving this dilemma may result in a similar USD trajectory this time round.
- Tariff increases ended up being more modest than initially feared. Average US tariffs on all trading partners increased from 1.5% to 3%. Disruption levels were high, with China facing a 17% hike in tariffs. Despite this steep increase, China’s trade surplus with the US grew. Disruption is again likely, but China and other trade partners may be more prepared and Trump’s desire to “do trades” may again limit the extent of across-the-board tariff increases.
- Being overly negative in the early stage of Trump 1.0 meant overlooking attractive entry points into the asset class. While we would caution against wishful thinking, we believe it is important to take into account the potential for upside surprises when evaluating EM markets amid prevailing negative investor investment.
A more attractive risk-return equation
The broad EM equity universe is trading at the same valuation level as 2016. Some markets, such as China, are even cheaper. By contrast, developed markets’ cyclically adjusted price-to-earnings (P/E) ratio moved 30% higher over the period, while the US market has become 60% more expensive, arguably limiting further upside for MSCI US and World indices.2
EM equities have not had a meaningful positive calendar year of inflows since 2021 and suffered near-record levels of outflows since the election according to recent EPFR data.3 Developed markets, and the US in particular, have been the beneficiary of this reallocation trade. The US now makes up almost 75% of the MSCI World Index. An underweight EM starting point is consensus across markets, which provides a solid foundation for potential flows over time.