As economies around the world work to recover from the depths of pandemic-induced recession, a further source of uncertainty for global financial markets draws close: the US presidential elections.
The domestic tussle for the White House may not have obvious consequences for assets in other regions. Yet the global clout of the United States means the course it charts can have profound implications, especially for some emerging markets.
Each possible result, from Joe Biden winning the presidency – with or without a Democratic majority in the Senate – to a status-quo win for Donald Trump, could shape different outcomes for emerging markets. The scenario most feared by the markets would be the uncertainty of a contested result.
Economic power: The almighty dollar
The US has huge economic influence globally, not only because of its vast economy but also because it prints the global currency. Its large domestic market also means that US trade policy cannot be easily ignored by other countries.
The economic backdrop for the election is one of recovery from recession, with record low US interest rates that are expected to stay low for several years. Both presidential candidates are likely to approve further fiscal stimulus as monetary stimulus reaches its limit. However, the impact of extra government spending will depend on how much is spent and on what.
Biden could opt to borrow relatively more and target expenditure on those with lower incomes, which would be expected to lead to a higher multiplier effect and a stronger economic recovery. Trump, on the other hand, looks likely to prefer more tax cuts, benefiting the wealthy and leading to a slower recovery, but could result in less US federal debt.
The nature of the fiscal stimulus will shape the yields on US government bonds, many of which currently offer investors negative yields, once adjusted for inflation. Negative yields on advanced government debt makes higher-yielding emerging market assets look more appealing in comparison.
A key variable for emerging market currencies is the relative strength of the US dollar. A weaker US dollar is a driver of investment into local currency emerging market bonds. While the post-election direction of the US dollar remains uncertain, the election result itself could end some of the uncertainty that has weakened emerging market currencies in the run up to the vote.
Foreign policy: More hawk or more dove?
There is more scope for divergence between the candidates on foreign policy. As an issuer of sanctions and provider of finance, and as the dominant global military power, the US plays a powerful role in geopolitics. US leadership is also essential for progress when tackling global challenges, as shown by its recent absence from international efforts to deal with the climate emergency.
Tense US-China relations have been a source of risk for emerging market assets over the past few years. Although the sources of the diplomatic and trade confrontation appear bipartisan in the US, a Biden presidency might lead to more predictable policy towards China, with greater involvement of experts.
It could also foster a return to a more multilateral approach to global development that could see institutions, like the International Monetary Fund, better empowered and resourced to support lower-income countries.
A Biden presidency might also lead to a ‘greening’ of US policy, with commitments to re-join the Paris Climate accord and target net zero carbon emissions by 2050. US action on climate change would encourage others to act.
Among emerging markets there will likely be winners and losers. While a Biden win might reverse a recent deterioration in trading relationships, for example with Mexico, it could put pressure on countries with poor environmental records, like Brazil. It might also lead to tougher policies towards Russia and Turkey.
Perhaps the biggest source of uncertainty will be for countries in the Middle East. Under Biden, it is possible that the US could upset the OPEC+ agreement on oil production, negotiate with and ease sanctions against Iran, while pushing for environmental action in its relations with oil exporters.
Shaping the 2020s
Whoever gets the keys to the White House, it is likely that the short-term prospects for emerging markets will be most greatly influenced by the path of COVID-19, in 2021 at least.
The US election is unlikely to result in any dramatic overnight changes in other regions of the world. It is almost certain, though, to shape outcomes for investors in emerging market assets, however subtly, over the next four years.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
M&G are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.