Harris or Trump: Who is better for emerging markets?

In the runup to the US presidential election, investors focused on emerging markets (EMs) are weighing the implications of a Harris versus Trump administration. While each could bring challenges, we believe the election uncertainty presents a compelling buying opportunity in EM equities. 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.

Trump: Headline risk high; EPS risk low

In 2016, at the time of Donald Trump’s surprise victory in the US presidential election, I was in Mexico at a meeting with Banxico, the country’s central bank. Immediately following the election results, we saw Mexico’s currency depreciate by over 10%. It was part of a knee-jerk reaction that sent EM shares into a 6% decline for the following week. EM stocks, as measured by the MSCI Emerging Markets Index, underperformed the S&P 500 Index by 8% for that week.¹ However, over the year following the election, EM stocks appreciated 30% and beat the S&P 500 Index by 6%. Equity markets in China, India, and South Korea outperformed while Mexico was a notable underperformer. 

The most obvious concern related to a Trump administration is the potential for higher tariffs on goods entering the United States from trading partners, particularly China. Estimates suggest that implementation of tariffs in isolation would be a 2.5% headwind to China’s gross domestic product.² 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.

It is important to consider the second-order effects. Companies will find ways to circumvent the tariffs. India and ASEAN³ markets should benefit from the “repackaging” of these goods as well as reshoring—businesses moving manufacturing back to their domestic markets. 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. Another risk that could reemerge under a Republican sweep would be a ban on Chinese American depositary receipts (ADRs) and other limits on investing in China.

A Harris win could be less disruptive

Based on eight US presidential cycles, emerging markets have historically fared 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. 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. While China remains the largest underweight position across our portfolios, we expect ASEAN, India, and Mexico to remain beneficiaries of this trend. In summary on trade, the impact of a Harris win would be less negative, but either outcome is manageable.

Risk/reward in EM equities is improving

Our bullish outlook for EMs extends beyond the opportunities from election volatility. We view the broadening of market leadership beyond the Magnificent Seven⁴ mega-caps as positive for EM equities, which, in our view, continue to offer an attractive risk/reward profile.

EM valuations remain attractive—trading at 12x forward earnings per share (EPS) versus 23x for the S&P 500 Index, a historically wide discount.⁵ These valuations also come with stronger fundamentals. 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.⁶

Election uncertainty, a weak US dollar, enticing valuations, and impressive profit growth potential all make us enthusiastic buyers of EM equities today.