As the US presidential election approaches, traders in emerging markets are bracing for potential upheaval. From Mexico City to Shanghai, concerns are rising over how the election outcome could disrupt global trade and affect economic stability in developing countries.
Uncertainty Surrounds Election Outcome
With just days to go before the election on Tuesday, the race is extremely close. Investors are particularly wary of a potential victory by Donald Trump. His proposed tariff and tax policies could limit imports and raise US interest rates. However, early Monday trading showed signs of traders scaling back their bets against Trump, as recent polls cast doubt on his chances of winning.
In recent weeks, hedge funds have increased their short positions against the Mexican peso, causing it to drop to its lowest level this year. The Chinese yuan has also weakened as the dollar has surged, marking its most significant gain in over two years. This shift has led to substantial withdrawals from funds focused on developing nations’ bonds. Additionally, emerging-market stocks recently experienced their worst monthly loss since January.
Stakes High for Emerging Markets
These price movements illustrate the high stakes for emerging markets. If Vice President Kamala Harris wins, these markets could see a swift recovery. Conversely, a Trump victory might trigger further selling.
“It’s challenging to take active currency bets in a completely uncertain election,” said Arif Joshi, co-head of emerging-market debt at Lazard Asset Management. He noted that the markets are already factoring in some of the risks associated with a potential Trump victory, suggesting that a win for Harris would likely lead to a positive shift for emerging markets.
Hints of this positive sentiment emerged on Monday, with currencies from Poland, Mexico, and South Africa showing gains as investors adjusted their positions following favorable polls for Harris.
Potential Consequences of a Trump Victory
Trump’s election could dramatically alter the current political landscape. His proposed tariffs could undermine exports from emerging markets and reduce demand for their currencies. Furthermore, Trump has questioned the US’s commitment to alliances like NATO and to supporting Ukraine against Russian aggression. This uncertainty has negatively impacted local bonds in several Eastern European countries and increased the risk associated with Ukraine’s dollar debt.
Robert Koenigsberger, founder and chief investment officer of Gramercy Funds Management, expressed concerns about the market’s reaction. “I wouldn’t be surprised to see an immediate negative response if Trump wins, with investors initially panicking before assessing his approach to governance,” he said.
Election Results May Not Be Immediate
The election outcome may not be clear on the night of the election, especially if results are close enough to necessitate recounts or legal challenges. The new president’s power will also depend significantly on whether their party maintains control of Congress, adding another layer of uncertainty to the economic landscape in emerging markets.
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