Spotlight on Trump and Tariffs: Impact on Emerging Markets

After US President Trump initially postponed the tariffs for Mexico and Canada that had been announced for February for a month, they came into force at the beginning of March. At the same time, he increased import tariffs for many Chinese products from 10% to 20%. So far, the Chinese stock markets have been unimpressed by this, especially technology stocks. These rose significantly, while mainland equities with a domestic market focus barely moved.

Technology stocks were driven on the one hand by China's surprisingly strong and rapid advances in the field of (keyword “DeepSeek”) and on the other hand by a high-profile alliance between head of state Xi Jinping and the major Chinese technology companies. Investors now expect or hope that there will be no further strong regulatory interventions for the time being and that the Chinese state could support its own technology companies in their battle with the US. In recent years, China's technology stocks had suffered greatly from concerns about possible new negative measures by the authorities, despite good business performance.

Equities focused on the Chinese domestic market could not keep pace with the price gains on the Hong Kong stock exchange. They remain under pressure from the ongoing uncertainties regarding the real estate market and the domestic economy.

China Strikes Back and Warns the US

China's response to the tariff increases did not take long. However, more remarkable than the expected prompt retaliation was the unusually strong statement from Beijing: “If the US wants a war, be it a tariff war, a trade war or any other kind of war, we are prepared to fight to the end.”

China's leadership seems to be much better prepared for the Trump administration than it was eight years ago – and the same can be said for the vast majority of Chinese companies. This is likely to have contributed to the calm reaction on China's stock markets so far, as has the fact that US President Trump is currently still nowhere near the “up to 60%” import tariffs he promised during his election campaign.

Overall, one and a half months after the new US president took office, there are still many unanswered questions regarding economic and fiscal policy – and particularly regarding tariffs. It is therefore difficult to assess further developments and their effects. Prices on the US stock markets corrected recently, while they rose on the bond markets. At the same time, the markets have quickly priced in* three interest rate cuts for this year, after only recently expecting no or at most one rate cut. In turn, the US dollar has begun to weaken somewhat.

US Dollar as the Key Factor

The performance of the US currency (as well as US Treasury bond yields) has always been of great importance for emerging market equities and bonds. Historically, a strong US dollar has usually meant a headwind for emerging market equity market performance, while a weak US dollar has provided a tailwind.

Currently, the trade-weighted US dollar is close to its all-time highs and fundamentally (measured by purchasing power parities) massively overvalued. This suggests that the US dollar is likely to fall in the future, as does the fact that in Trump's first term in office, the US currency went into a tailspin shortly after he took office. Trump is likely to be able to implement his economic plans better with a falling US dollar than with a strong one, and so he should have a certain interest in a weaker US currency.

However, this is counteracted by the fact that the European Union, the United Kingdom, and Japan will probably continue to lag behind the US in terms of economic growth for the foreseeable future. Overall, however, there is more to be said for a weaker US dollar over the next 12 to 24 months than for a stronger or unchanged one, which would tend to be positive for emerging market investments.

Emerging Markets Outlook Remains Good

In general, we view Emerging Markets as quite resilient to an intensified trade conflict with the US, as the downside risks are well known and should therefore be largely priced in. The fact that stock prices in Mexico and China, for example, have hardly reacted negatively to the new tariffs that have since been imposed can certainly be seen as confirmation of this. In addition, at least some of Trump's trade policy measures could also be quickly repealed if agreements are reached with the affected countries. Furthermore, there is scope for countervailing measures in many Emerging Markets, particularly on the fiscal side. Compared to developed markets, growth momentum continues to look favorable. Countries such as Mexico, China, Taiwan, South Korea, Thailand, and Vietnam, which export heavily to the US, could be particularly hard hit by any new US import tariffs.

Emerging Markets: Opportunities, but also Risks

Naturally, there are also a number of risks to this emerging market outlook. An overly relaxed fiscal policy in the US could lead to overheating and a renewed rise in inflation. This would drive up the US dollar and US interest rates, which would be negative for emerging market equities and bonds. A US recession also represents a risk that, while currently unlikely, cannot be ruled out entirely, especially if Trump is serious about making cuts and reducing the budget deficit. In geopolitical terms, the conflicts in the Middle East and Ukraine pose additional risk potential, especially if they were to escalate again.

*A “priced-in” interest rate cut means that the majority of capital market participants already expect the central bank to lower interest rates. This expectation is already reflected in the current prices of stocks, bonds, and currencies.