As the US presidential election looms, investors focused on emerging markets (EM) are starting to weigh the implications of a Harris versus Trump outcome.
Although both candidates could bring challenges to EM as an asset class, any uncertainty presents a buying opportunity, according to Brian Freiwald, portfolio manager at Putnam Investments.
“Election polling data has oscillated in recent months, but our conviction has not—we believe the outlook for EMs remains bright regardless of who is elected in November,” he said in a recent note.
A Trump win
One of the most obvious concerns EM investors have is the potential for higher tariffs on goods entering the world’s largest economy under a Trump administration.
During Trump’s previous presidency, tariffs were imposed on China and various other countries for goods ranging from solar panels and washing machines to steel and aluminium.
Given China’s already weakened economy, a similar bout of policies could be another headwind for a contry that accounts for a quarter of the MSCI Emerging Markets index.
Freiwald said: “Estimates suggest that implementation of tariffs in isolation would be a 2.5% headwind to China’s gross domestic product.”
“In addition, Taiwan, South Korea, and Mexico all have high export exposure to the US economy and sensitivity to past tariff announcements from the Trump administration.”
Taiwan, South Korea and Mexico together account for roughly one third of the MSCI emerging market index.
However, Freiwald said investors need to consider the second-order effects since companies will find ways to circumvent the tariffs.
“India and Asean markets should benefit from the “repackaging” of these goods as well as reshoring—businesses moving manufacturing back to their domestic markets,” he explained.
“Notably, we believe there could be winners in China as it ‘retaliates’ by accelerating its replacement of US businesses with domestic competitors. This could create challenges for some large US companies.”
A Harris win
The impact of a Harris win would be less negative than a Trump win, according to Freiwald.
He noted that based on eight US presidential cycles, emerging markets have historically performed better with a Democrat in the White House.
“The Biden administration kept the Trump tariffs in place, and we expect a Harris administration would maintain the status quo,” he said.
“This includes anti-China trade policies, which, right or wrong, have support from both sides of the aisle.”
“The diversification of supply chains outside of China will likely continue, but this is a decade-long trend that is already priced in.”
He expects Asean, India and Mexico to remain beneficiaries of this trend, and accordingly China remains the largest underweight position across Putnam Investment’s portfolios.
No matter who wins the election, both administrations are expected to run large US budget deficits and put downward pressure on the US dollar, according to Freiwald.
“Regardless of fiscal policies, inflation expectations are falling fast, driving US interest rates and the US dollar lower,” he said.
“EM equities historically outperform in periods of US dollar weakness, which is increasingly looking like the base case.”
He also noted that EM valuations remain attractive—trading at 12x forward earnings per share (EPS) versus 23x for the S&P 500 Index.
“These valuations also come with stronger fundamentals,” he said. “For the MSCI EM Index, the market is forecasting EPS growth of 17% in 2024 and 16% in 2025, outpacing growth rates in the US and other developed markets.”
