Donald Trump’s second term as US president will mark a pivotal moment for emerging market debt, presenting both challenges and opportunities for investors. While the new administration’s policies may exacerbate short-term volatility, they also create openings for well-positioned investors.

The clarity of the election result removed a major source of uncertainty, with positive risk sentiment dominating the initial market reaction. Equities rallied globally, US Treasury yields surged and the dollar strengthened, while commodities such as crude oil and gold declined in the risk-on environment.

Within EMD, sovereign bonds attracted strong inflows, particularly in countries poised to benefit from Trump’s foreign policy priorities. Ukraine and Argentina stood out as top performers, driven by optimism around potential geopolitical breakthroughs. Meanwhile, EM corporate debt lagged slightly, reflecting cautious sentiment amid policy uncertainty. Initial outperformance by high-yield bonds evened out as investment-grade bonds enjoyed the tailwind from a rates rally.

What can investors now expect from Trump’s administration, given cabinet nominations and policy signals? More importantly, how will these developments shape EMD markets, and where do the opportunities lie within this dynamic asset class?

A shifting policy outlook: trade, tariffs and beyond

Trade policy is expected to take centre stage in Trump’s second term. Proposed tariffs – including a blanket 10% duty on all US imports and a 60% tariff on Chinese goods – signal an aggressive stance, though implementation may face legal and political challenges. Such measures are likely to deepen US-China tensions, with repercussions across emerging markets, particularly in Asia.

Immigration reforms are another priority, with stricter enforcement expected via executive orders. While this may impact remittance-dependent economies like Guatemala and Honduras, broader economic effects on EMD appear limited in the near term.

Energy policy, including deregulation and potential sanctions on Iran and Venezuela, is another area of focus. These actions could shape oil prices and influence the outlook for commodity exporters, a significant segment of the EMD universe. The future path of US sanctions will be critical in determining opportunities for oil-producing nations.

Adapting EMD positioning to the new reality

For EMD investors, the implications of Trump’s policies require careful recalibration. A stronger US dollar and tariff-driven trade disruptions are expected to weigh on local currency markets, with emerging market foreign exchange continuing to act as a key shock absorber (Figure 1). This makes hard currency bonds more attractive, as they are less directly exposed to currency volatility.

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Figure 1. Dollar strengthens against regional emerging markets
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Source: Bloomberg. Franklin Templeton Fixed income. Emerging markets represented by JPM GBI constituent countries. Data as of 29 November 2024.

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In Asia, China’s response to US trade measures will be pivotal. While we expect further renminbi weakness, fiscal and monetary support should stabilise the broader growth outlook. However, trade-exposed economies in southeast Asia, including Malaysia, Thailand and Indonesia, may face continued pressure. India, with its strong domestic growth drivers, appears better positioned within the region.

Latin America presents mixed prospects. Despite volatility surrounding the Mexican peso, we remain optimistic about Mexico’s local bond market, viewing extreme tariff scenarios as unlikely. Nearshoring trends and economic resilience could provide medium-term support. Countries such as Argentina and El Salvador are likely to benefit from Trump’s alignment with authoritarian regimes and his foreign policy priorities.

In Europe, weak growth and geopolitical risks temper enthusiasm for central and eastern European currencies. However, idiosyncratic opportunities exist in markets such as Türkiye and Egypt, where easing inflation could pave the way for rate cuts.

High-yield sovereign bonds remain attractive (Figure 2), particularly at the long end of the curve. Nigerian bonds, for example, stand out due to structural improvements that enhance economic self-sufficiency and bolster investor confidence.

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Figure 2. Emerging market spreads by ratings bucket in 2024
Basis points

 

Sources: Bloomberg. JPM, Morgan Stanley, Franklin Templeton Fixed Income Research. JPM EMBIG Index breakdown. From 1 January 2024 to 29 November 2024.

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Corporate debt within EMD offers additional diversification and yield potential. Most issuers have the financial flexibility to weather trade-related pressures, and our focus remains on fundamentals such as cashflows, liquidity and currency mismatches. Local currency corporates provide diversification benefits, but risks must be appropriately compensated.

Commodity exporters with low-cost production and strong fiscal positions also present opportunities. Iraq, Kazakhstan and Angola are well-placed to navigate oil price fluctuations, supported by favourable geopolitical dynamics and low lifting costs.

A framework for opportunity

In our view, EMD continues to offer a compelling case for diversification and yield enhancement. In a complex and shifting global environment, adopting a considered, forward-looking strategy will be key to unlocking its full potential.

By leveraging fundamental research and maintaining flexibility across sectors and regions, we believe that institutional investors can capitalise upon the evolving dynamics of this diverse asset class.

 

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