Emerging market dividend: resilience in a volatile world

With the presidential election behind us, the knee-jerk market reaction has been that a second Donald Trump presidency would spell trouble for emerging markets (EMs).

Investors are concerned that Trump’s America-first policies will disrupt trade, increase export costs, and propel the US dollar higher.

And while these concerns are valid, a deeper look reveals a more nuanced and encouraging story for EMs.

A quick recap

Investor sentiment towards EMs started strong in 2024. This was driven by expectations of robust infrastructure development, a technology boom, and a slowing US economy to offset China’s delayed recovery.

However, as the year progressed, volatility increased. Investors scaled back rate-cut expectations and sought safe havens like the US dollar. The election of Donald Trump as US president in November further cast doubt on EM prospects.

A look ahead

The consensus is that 2025 could be challenging for EMs, with trade, tariffs, and interest rates weighing on the outlook. US deregulation and tax cuts might strengthen the dollar, posing a challenge for EMs.

On the other hand, low EM equity ownership and attractive valuations offer the potential for positive surprises. EM central banks and governments have demonstrated robust fiscal and monetary discipline for over a decade. Healthy corporate and country debt levels have added to this resilience.

The Trump tariffs

Meanwhile, some of Trump’s controversial campaign promises, including tariffs on all Chinese imports, have already materialized despite their potential negative impact on the US economy.

At the time of writing, the US has implemented a 10% tariff (modest compared with the 60% he threatened during the election campaign) on all Chinese imports. The Chinese government has been quick to announce retaliatory tariffs of 10-15% on US energy and farm equipment and possible export restrictions on critical minerals.

China’s response was targeted rather than broad-brush, which may reduce the risk of the trade war spiraling. Negotiations are possible, although it’s unclear what sort of deal either side wants at this stage. It’s also unclear whether Trump’s threats are meant to re-order the global economy or simply gain concessions.

The US’s 25% tariffs on Mexico and Canada were temporarily suspended until early March. The pause came after leaders of both countries announced new border measures designed to stop the flow of illegal immigrants and fentanyl. This response aligns with our expectations that Trump principally sees non-China tariff threats as negotiating leverage.

That said, Trump’s tariff threats to other regions (including the European Union), his comments since the inauguration, and the announcement of an External Revenue Service (which, incidentally, already exists in the form of the Commerce Department and U.S. Customs and Border Protection) may also point towards a different rationale. Trump may also be attempting to use tariff revenue to offset the income lost due to his planned aggressive domestic tax cuts.

What about China?

History has shown that the “Trump tariffs are bad for China” narrative is not the defining driver of returns in China. The direct impact of tariffs was relatively muted during the 2018 trade war. After the initial shock, Chinese markets rallied from the end of 2018 to mid-2021.

This rally faltered because of domestic factors – radical COVID policies, a regulatory crackdown, and property deleveraging – rather than tariffs. Furthermore, following the first Trump presidency, Chinese companies have developed other destinations for their exports, making them less exposed to tariffs. At the same time, China has diversified its imports by deepening ties with Central Asian countries, for example.

Importantly, recent comments from the Chinese government suggest it will launch much-needed fiscal stimulus to boost consumption. This includes Xi Jinping’s December comments, stating that more proactive macroeconomic measures were required.

Reasons to be positive

EMs are benefiting from favorable microeconomic trends. Historically, EM performance has been tied to the global investment cycle, with many companies producing tangible goods based in these regions. Now, a new global capital expenditure (CapEx) cycle – driven by technology, energy transition, supply chain de-risking, and growing domestic demand – is creating opportunities for EM companies and bolstering their earnings growth.

Developments in Mexico, Brazil, India, and the Middle East are particularly encouraging. India stands out with robust economic growth, driven by infrastructure development, an early-stage private CapEx cycle, and a gradual recovery in rural consumption. All of this is supported by business-friendly policies.

The Gulf states have remained relatively insulated from last year's EM challenges and regional conflicts. They benefit from US dollar pegs and strong company earnings growth. While sentiment on Mexico is negative, we believe markets have priced in a lot of the bad news. There are also numerous robust, well-run Mexican companies in which to invest. A potential inflationary effect may also limit the ability of the US to undermine trade with Mexico too severely.

Potential negatives

A few EM countries have made fiscal mistakes over the last few years. Nonetheless, these capital management errors are cyclical, masking important growing domestic economic resilience in many EM nations. This should raise the relevance of EMs as an asset class, increasing its ability to provide effective diversification for investors. Companies focused more on domestic consumption should do well in this environment.

Final thoughts

The next four years could usher in an era of aggressive US exceptionalism. Tariffs, a strong US dollar, and domestic-focused policies will pose challenges to EMs. However, we’re increasingly finding EM companies and countries deepening ties with each other. We’re also uncovering companies with resilient balance sheets, strong cash flow generation potential, and compelling valuation support that are not dependent on the US. Furthermore, structural tailwinds – in particular, increased CapEx – remain intact. So, despite the headlines, the EM opportunity remains alive and well.

Matt Williams, senior investment director, global emerging markets equities.

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