CONTRIBUTORS
Nicholas Hardingham, CFA
Portfolio Manager, Franklin Templeton Fixed Income
Stephanie Ouwendijk, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Robert Nelson, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Joanna Woods, CFA
Portfolio Manager, Research Analyst, Franklin Templeton Fixed Income
Carlos Ortiz
Research Analyst, Franklin Templeton Fixed Income
Jamie Altmann
Research Analyst, Franklin Templeton Fixed Income
Sterling Horne, Ph.D
Research Analyst,
Franklin Templeton Fixed Income
Preview
This has been an election-heavy year for emerging markets (EMs), thus far yielding some landmark results that are already affecting the policy outlook in several countries, including Mexico, South Africa and India. Indeed, roughly half of the global population is, or has been, directly impacted by an election this year. Still, we believe the election that’s likely to have the broadest impact across the whole of the emerging markets universe, with some of the most consequential tail risk scenarios, is the US election.
The potential return of President Donald Trump, and in particular the possibility of a Republican sweep in Congress, may mean a return to a policy agenda that prioritizes US protectionism and isolationism possibly to the detriment of free trade and international cooperation between the United States and its partners around the world. The precise policy mix is difficult to forecast, as are the implications, since policy priorities (in both parties) can have offsetting macro effects. On the whole, however, we see a much more difficult environment for emerging markets under Trump, especially with respect to long-term growth expectations, and especially in the event of a Republican sweep, whereas a Kamala Harris victory is more likely to represent a continuation of the status quo on issues relevant to EMs.
In this paper, we cover the following four broad election outcome scenarios and provide an overview of the potential implications of each for US trade policy, foreign policy and domestic policy. We also put a focus on some of the more extreme cases and their implications for emerging markets.
- Trump with a Republican Congress
- Trump with a divided Congress
- Harris with a divided Congress, and
- Harris with a Democratic Congress
Given the lack of clarity in polling and the uncertainty around policy implementation, it’s extraordinarily difficult to make any sweeping predictions, but on the range of outcomes and potential scenarios, we can provide perhaps a bit of clarity.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt.