Tuesday, November 5, 2024

Election Anxiety Grips Emerging Markets as Investors Slash Risk

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(Bloomberg) — From Mexico City to Shanghai, traders whipsawed by a volatile year are preparing for a fresh political jolt: A US presidential election that’s threatening to upend global trade and potentially roil the economic outlook across the developing world.

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As the race remains neck-and-neck in the runup to Tuesday’s vote, investors have been positioning for the fallout of a victory by Donald Trump, whose tariff and tax plans would likely curb imports and put upward pressure on US interest rates.

As a result, hedge funds have been stepping up bets against the Mexican peso, sending it sliding to the lowest this year. The Chinese yuan has slipped, too, as the dollar staged its biggest advance in over two years. Investors have yanked money out of funds focused on developing countries’ bonds and around the world, emerging-market stocks just had their worst monthly loss since January.

The price movements show the high stakes across emerging markets, which is leaving them primed for another round of selling or a rapid rebound if Vice President Kamala Harris is handed a victory at the polls.

In “an election that is a complete toss up, it is very difficult to take active currency bets,” said Arif Joshi, co-head of emerging-market debt at Lazard Asset Management, who said markets are pricing in some of the risks of voters returning Trump to the White House. That suggests a Harris win would be “a structural bullish move for emerging markets.”

In the US, Trump would likely alter the status quo far more significantly than Harris, a former US Senator who has served as President Joe Biden’s vice president for the past four years. In emerging markets, the main risk stems from Trump’s plan to enact tariffs, which would weaken their exports and demand for their currencies.

Trump has also cast doubt on the US’s commitment to alliances like the North Atlantic Treaty Organization and to Ukraine’s efforts to defeat Russia’s invasion. That has weighed on local bonds of some eastern European countries and pushed up Ukraine’s dollar debt on wagers that Trump’s election may push it to cut a ceasefire deal with Russia.

“I wouldn’t be surprised to see a knee-jerk negative reaction if Trump is elected, with everybody kind of freaking out, and then starting to see if the approach is more pragmatic,” said Robert Koenigsberger, founder and chief investment officer of Gramercy Funds Management.

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