The US presidential election is a major event that affects global financial markets, with its impact extending beyond the borders of the United States to include emerging market economies.
As the world’s largest economy, the United States shapes global financial conditions through its policies on growth, trade, and international relations.
UBS analysts have identified several ways in which the 2024 election could impact emerging markets, particularly through shifts in the US macroeconomic landscape, trade strategies, and geopolitical relations.
Emerging market assets are closely linked to the outlook for the US economy. Factors such as GDP growth, inflation, interest rates, and the strength of the US dollar may change depending on the outcome of the election.
For example, a Republican victory could boost US economic growth, but it could also lead to higher inflation and interest rates. These conditions could initially strengthen the US dollar, but this could pose challenges for emerging markets.
Historically, a stronger dollar has made borrowing more expensive for emerging market countries, many of which have large dollar-denominated debts. This tightening of financial conditions can deter foreign investment and slow economic growth in these markets.
Historically, emerging market assets have seen short-term volatility following US elections due to uncertainty about changes in US leadership. The value of the dollar, a key factor, is of particular importance.
“The US dollar accounts for about 60% of global foreign exchange reserves. The country has the largest and deepest capital markets in the world,” UBS analysts said in a note.
While stronger growth in the United States could fuel demand for goods and services from emerging markets, higher interest rates and a stronger dollar could create financial headwinds, limiting the potential for increased investor interest.
Trade policy is another crucial channel through which the U.S. election could affect emerging markets. U.S. presidents wield significant power in shaping the country’s trade relations, and tariffs have become a prominent policy tool in recent years.
A Republican administration, especially under Trump, may revive strategies that impose heavy tariffs, which could increase uncertainty and reduce the attractiveness of emerging market assets, especially in export-dependent economies such as Mexico and many Asian countries.
On the other hand, a Democratic administration might favor more multilateral trade policies, which could reduce trade tensions and provide greater stability for emerging economies in accessing global markets.
Geopolitics is another area of concern. America’s relations with major global players such as China, Mexico, Argentina, Venezuela, and Russia could evolve greatly depending on who wins the presidency.
Analysts said former President Trump had repeatedly expressed a preference for actively using tariffs as a tool of trade policy and appeared likely to take a more unilateral and isolationist approach to addressing cross-border issues, raising risks for emerging markets, especially those that rely on stable trade and diplomatic relations with the United States. In Latin America, for example, Mexico could see increased volatility depending on shifts in U.S. immigration or trade policies.
However, Argentina may benefit from the strong relationship between its president and Trump, which could lead to improved bilateral relations.
In Asia, the election impact is likely to be complex, involving both risks and opportunities. US-China relations, already on a tense and turbulent path, are expected to remain a challenge regardless of the election outcome.
More restrictions are likely to be imposed on Chinese technology companies, prompting global investors to shift their focus 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 expected to attract more investment interest from US and international companies.
Meanwhile, the outcome of elections in the Middle East and Central and Eastern Europe could have a profound impact on the geopolitical landscape.
A Republican victory would lead to increased fossil fuel production in the United States, which could lead to lower global oil prices and put additional competitive pressure on Gulf exporters.
“A Trump presidency would also likely lead to a sharp decline in financial and military support for Ukraine and a weakening of NATO, which would increase the geopolitical risk premium on European assets,” analysts said.