Emerging Markets Debt

The surprise Trump victory injects more uncertainty into the market and we see both opportunities and risks in emerging markets as a result.

One of the main risks that we see relates to global trade. Trump’s pre-election rhetoric suggests that not only is he anti-TPP (Trans-Pacific Partnership) but also that other existing trade agreements could be at risk under his administration. It remains to be seen how much of this rhetoric will turn into policy, but broadly speaking, if the U.S. takes a step toward isolationism, the impact will be negative on emerging markets, which are open economies reliant upon global trade.

When it comes to monetary policy, the pace of future Fed hikes will likely be slower under Trump than would have been the case under Clinton, and in fact, the Fed could be forced to reverse course and cut rates if global trade falls and / or market sentiment deteriorates. If Trump were to give a voice to the fringes of his party who support abolishing the Fed, we would become extremely concerned as we believe the Fed’s role as a “lender of last resort” is a critical counterbalance to the inevitable instability of a capitalist economy.

It’s not all doom and gloom, however. On the positive side, the American system is set up to allow checks and balances. Even during times when presidents have had majorities in the House and Senate, it has not always been easy to pass reforms. Rather than rubber-stamping a president’s proposals, legislators must answer to the constituents who sent them to Washington and whose interests may differ from the president’s. This could make implementing radical reforms difficult.

Additionally, the U.S. economy is broadly in a strong position, which means that the uncertainties associated with a Trump presidency are at least set against a healthy economic backdrop.

Finally, while Mexico has been in the headlines given Trump’s proposal to build “The Wall,” we believe that the market is overpricing the negative potential economic effects that a Trump presidency will have on the country. Ultimately, we believe this could prove to be a buying opportunity in the Mexican peso and in the country’s sovereign and corporate debt issues.

Ricardo Adrogué

Head of Emerging Markets Debt

Market Insights