by Regina Chi, CFA® VP & Portfolio Manager, AGF Investments Inc.
A focus on regions with strong economic growth and supportive reforms may help navigate opportunities and risks inherent in developing economies.
The return of Donald Trump to the White House in 2025, often referred to as “Trump 2.0,” is likely to bring renewed disruptions to China and Emerging Markets (EM). Trump’s promised trade policies, including proposals for across-the-board tariffs of 10 to 20% and a specific 60% tariff on Chinese goods, could lead to significant volatility in global supply chains. Such measures could heavily impact China’s export-oriented economy, potentially leading to further shifts in production to other countries. Emerging markets that are closely linked to China through trade or investment may also face adverse effects from these disruptions. At the very least, Trump’s more protectionist and confrontational approach towards trade could exacerbate economic uncertainty, affecting investor confidence in both China and other EMs.
This scenario, however, might not provide a complete roadmap to the evolving landscape for Emerging Markets next year. The trade tensions between the U.S. and China during 2018-2019 provide potentially valuable insights into how EM’s might navigate future challenges. Despite the imposition of tariffs during Trump’s first term, China’s export sector demonstrated resilience by redirecting trade flows towards other global markets, particularly within emerging regions. China is now less reliant on access to American markets compared to the last time Trump escalated tariffs.
The wave of American import duties that began under the Trump administration in 2018 and continued under Biden eventually impacted roughly US$400 billion in Chinese goods. In response, Chinese factories shifted their focus to customers in Southeast Asia and Latin America. Over the past six years, China’s share of U.S. imports has fallen from 20% to 13%, according to TS Lombard, an investment research firm in London. This adaptability suggests that EMs might be able to mitigate some adverse effects of trade disputes through diversification and strategic partnerships.
Importantly, the U.S.-China playbook may not follow the same path this time. First, the impact on global and Chinese corporate confidence might not be as significant compared to 2018-2019, as U.S.-China trade tensions have now persisted for seven years. Second, a new round of tariffs on China may generate less revenue, given China's already reduced share of U.S. imports. The U.S. trade deficit with China has also narrowed since 2018, with China's share of the trade deficit dropping from 50% to 25%. This suggests that tariffs on Chinese imports will have a more limited effect on the overall U.S. trade deficit.
Source: Econovis as of September 7, 2024.
Additionally, unlike during Trump's first term, when nearly two years were spent in tit-for-tat negotiations, trade talks could begin right away. China may also opt to de-escalate sooner and pursue a deal, given its weaker economic position as it attempts to stimulate its domestic economy and avoid a deflationary spiral.
Meanwhile, China is actively implementing measures to stimulate its economy and encourage growth. These efforts aim to support local government and boost confidence, potentially leading to sustained economic expansion. China has been striving for greater self-sufficiency, particularly in key sectors such as technology, energy and agriculture, out of a desire to reduce dependence on foreign imports and mitigate risks associated with global trade disruptions. By investing heavily in research and development, encouraging domestic production and supporting local industries, China aims to create a more resilient economy capable of sustaining growth independently of external influences.
Outside of China, several other emerging markets bear watching. For example, India is experiencing strong economic development fuelled by government investments in infrastructure and a supportive business environment. Growing corporate profitability, reduced debt levels and strong local investor interest, as well as increasing domestic demand, are also contributing to the positive outlook. India’s ability to capitalize on its demographic dividend, with a young and growing population, further enhances its growth potential and attractiveness to foreign investors. It might also benefit from any heightening of U.S.-China trade tensions: the country is positioning itself as an alternative to China in global supply chains, particularly in the manufacturing and technology sectors, which could lead to significant economic gains in the coming years.
South Africa, meanwhile, has seen some positive developments recently, including the formation of a Government of National Unity (GNU) and the prospect of economic reforms and improvements. While political risks persist, there is hope that new policies will support growth and create opportunities for investment. The focus on infrastructure development and addressing social inequality could be a positive step towards creating a more stable business environment. Investors may find value in South Africa’s efforts to stabilize its economy and implement growth-oriented reforms, despite ongoing challenges.
In Latin America, Brazil’s central bank has taken a measured approach to managing the economy, which has helped maintain stability and could allow businesses to thrive despite existing political and fiscal challenges. A renewed focus on fiscal discipline and structural reforms, along with an increase in domestic demand, could help Brazil sustain its economic recovery and attract more foreign investment.
In general, the outlook for Emerging Markets presents both opportunities and challenges, but the potential for growth is clear even under Trump 2.0. China will continue to strive for self-sufficiency, India is well-positioned for continued expansion, while South Africa offers long-term opportunities despite short-term hurdles. Investors are encouraged to focus on regions with strong economic growth and supportive reforms, while being mindful of the inherent risks of investing in developing economies. A diversified approach can help manage these risks and capture the growth potential that Emerging Markets offer, particularly in places where government policies and economic initiatives are driving positive change.
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Regina Chi, CFA®VP & Portfolio ManagerAGF Investments Inc.
The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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