The recent US presidential election between candidates Joe Biden and Donald Trump has seen divisions on a wide range of policies, from COVID-19 and climate change to trade. The market volatility that has been caused by this election has generated speculation over the past 6 months which has been especially noticeable in Emerging Markets (EM). EM stocks, such as Krane Shares, CSI China and Internet ETF, have dramatically increased due to Biden’s presidential triumph.
The Morgan Stanley Capital International (MSCI) gauge, a source of equity returns in 47 developed and emerging markets, has risen past its previous peak earlier this March. Investors are excited by the prospect of a Democratic president in conjunction with a Republican-controlled senate. A divided Congress has improved investor expectations of short-run economic growth when considering the heavy economic stimulus projected over the months to come. Investors are speculating that the burden will be placed on the Federal Reserve and other central banks funnelling more cash into the financial system. With the Federal Reserve purchasing more bonds, bond prices will rise and may lead to more being invested in higher-yielding emerging markets like Mexico and Indonesia. This is likely to cause a rally in emerging currencies, such as the Mexican peso which has already reached its highest levels since March 2020. This is because of the increased demand for domestic goods by foreign investors, which requires currency conversion (dollar to peso).
Biden’s victory presents a large opportunity for EM investors. “The large bounce in equities this week creates an opportunity for investors to reassess and rebalance their portfolios in preparation for a President Biden and divided Congress,” said Mark Haefele, CIO of UBS Global Wealth Management. This may help reverse declines in these same stocks during the pandemic. Both EM equities and bond funds have suffered declining net outflows since March, 25.8 billion USD and 9.2 billion USD respectively according to Morningstar data, due to the COVID-19 pandemic. This is significant as the pick-up in market capitalization in these sectors may be illustrative of early signs of an emerging market recovery from the pandemic.
Moreover, in the coming months, Biden’s hope to weaken the dollar, in order to reinstate a competitive US export market, would mean central banks in developing nations would be able to keep interest rates lower, supporting growth. Higher US growth especially impacts the Brazilian export industry in a positive way, with the US being one of Brazil’s largest importers. However, the Brazilian currency ‘real’ may have its growth limited by the politics of Brazilian US-trade policy. The two countries have no free trade agreement at this moment and Brazil’s President Bolsonaro had previously been a large advocate for the Trump administration. The possible misalignment of values between Biden and Brazil’s Bolsanaro may therefore work against Brazil. As a whole however, a more coherent trade policy promised by Biden, consisting of rebuilding damaged relationships with key trading partners, should give companies more confidence to invest across the emerging world.
However, despite these favourable politics, a major obstacle still exists to emerging market trade: the tensions between the US and global powerhouse, China. Under Trump, the US has had a tenuous relationship with Chinese officials, with issues ranging from the treatment of COVID-19 and international trade, through to issues regarding defence in Taiwan. Relationships with China are set to remain hawkish with a Biden presidency unlikely to reverse much of his predecessor’s confrontational policy. The Democratic candidate even labelled Mr Xi a ‘thug’ on the campaign trail. Many Chinese Investors are shorting US stocks with the speculation that Biden’s triumph will lead to an exacerbation of trade relations between the two superpowers or at least renewed hostility.
In all, Biden’s economic policy, which aligns itself with Economic Social Governance (ESG) friendly values, favours investment into emerging markets. This is especially relevant as we can expect to see investment into smaller businesses in emerging markets as opposed to large corporations. However, many investors are still considering the big question of whether relationships between US and China will improve. This remains the largest hurdle for global investors, especially in a post-COVID-19 world. Should Biden’s historically tactful diplomacy help relations with China, investors would likely respond with further outflows into emerging markets.
By Tarun Odedra
Sector Head: Jared Gibson