Trump Promised Policies Complicate Emerging Markets Trade

Investors are scrambling to figure out where to put their money across emerging markets while bracing for potentially disruptive policies under the new Trump administration.

The policies are expected to include higher tariffs and lower taxes in the U.S., which may result in a stronger dollar and stickier inflation as the new administration takes shape. This combination is making big exporters like China and Mexico look perilous for investors, while the likes of India and Brazil emerge as potential winners, analysts said.

“A lot of things have to fall in a certain order” before investors have more clarity on the global impact of Trump policies, said Malcolm Dorson, head of EM strategy at Global X ETFs. He said the expected U.S. policies will come at a time when the largest emerging market, China, is struggling to revive growth.

“EMs should be in a good place, but there is definitely a lot of room for people to push back on each of those individual drivers,” Dorson said.

The Impact of a Strong Dollar

Some economists say Trump tariffs, combined with proposed tax cuts and other policies, would send prices for goods higher in the U.S., putting a floor on how much the Federal Reserve could cut interest rates. That would keep the dollar strong, with mixed consequences for emerging markets.

The MSCI Emerging Market index has been trending lower since the election, as the dollar strengthens. The WSJ Dollar Index, which weighs the greenback against a basket of 16 currencies, including emerging markets, has been rising.

“When the dollar is strong, financial conditions tighten and financing trade and exports become more complicated and more expensive,” said Valentina Bruno, a finance professor at American University.

Jake Schurmeier, portfolio manager at Harbor Capital, said he has trimmed exposure to emerging-market debt, citing the strengthening dollar.

“That’s the terror for us,” Schurmeier said about the currency factor. “EMs will have to deal with the fact that the dollar will be stronger.”

Risk to China

Beyond currency markets, Trump’s promised higher trade tariffs threaten a key source of revenue for countries heavily dependent on exports like China, Mexico and Vietnam.

China is expected to bear the brunt of the Trump tariffs. The president-elect has promised a 60% blanket levy on Chinese imports. If applied in full, the policy could lead American importers to procure shipments from other countries at a time when Beijing struggles with a slowing economy.

“China is obviously the biggest risk,” Schurmeier said.

Mexico, which is highly reliant on sales to the U.S., is also among the countries likely to be closely watched by investors worried about an economic slowdown. Vietnam is often mentioned as another potential victim of Trump’s tougher stance on trade.

On the bright side, some experts say that stiff U.S. tariffs could leave big exporters sitting on massive inventories they may try to sell cheaper elsewhere. The resulting tide of cheaper goods sloshing around global markets could help cool down inflation in some countries, allowing their central banks to lower borrowing costs and boost economic growth.

“China would still have a lot of manufacturing capacity and inventory” and will be looking for new buyers, Global X’s Dorson said.

Winners in Global Trade

India could be on the winning side of Trump policies. The country is already booming and could gobble up U.S. market share when tariffs send Chinese competitors in retreat. Prime Minister Narendra Modi, who referred to Trump as “my friend” in a congratulatory post on X after the election, is considered to have a good relationship with the president-elect.

“India is the highlight in emerging markets,” Dorson said. “It is a key beneficiary from uncertainty around China and supply diversification out of China,” he said.

The World Bank expects India’s gross domestic product to grow 7% in the year ending in March 2025, after expanding 8.2% in the previous period. Exports play a key role in the country’s economic outlook.

Half a world away, Argentina is led by another Trump ally. Since being inaugurated late last year, President Javier Milei has pushed for fiscal discipline and his efforts seem to be bearing fruits: 12-month inflation was 193% in October, down from 289% in April, according to official data. Borrowing costs are falling but remain among the highest in the world.

Neighboring Brazil is often cited by analysts as another potential gainer under Trump. Latin America’s largest economy is less reliant on trade than other emerging markets, so higher U.S. tariffs are unlikely to be a major problem. Brazil’s central bank is raising interest rates to fight a new surge in inflation and might benefit from cheaper Chinese imports.

On the other hand, a weakened currency and declining stock prices could make local assets look cheap for investors shopping with dollars.

“I really think the Brazil story is priced incredibly cheaply,” Dorson said.