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US Election impact on EM economies


With less than 20 days away from the prominent US election and 100 days away from Inauguration day, investors, anxiously awaiting the electorates’ verdict, are looking closely at both polls and probabilities.

The importance of such election is mammoth and comes at a time, where uncertainty, stemming from the unprecedented Covid-19 pandemic is on a high. This, leading to a troubling period for the vast majority of economies, triggering recessions and a period of economic despair.

Although nothing is as yet set in stone and small changes in voter turnout or an unexpected plot twist in an already a turbulent year, may alter the predicted outcome in Donald Trump’s favour, Joe Biden, former vice-president of the US and representative for the democratic party, seems to be the favourite. At a time when millions of Americans have already cast their vote or are planning to do so before Election Day on November 3, the Democratic representative Joe Biden is enjoying a significant polling advantage, with several national polls, portraying a double-digit advantage, over president Trump.

Undoubtedly, the result of such important election shall leave an impact, varying according to the proposals put forward, on Emerging Markets.

Albeit contrary to the current predictions, should president Trump, seeking to be re-elected for a second term succeed, Emerging Markets (EM), attempting to recover from the ensuing impact of the Covid-19 pandemic, may once again bear the brunt of an escalating trade war between the world’s two largest economies.

Although many US policies impacting EM’s are at this stage, not yet formulated and thus not definite, trends currently being foreseen under a Biden administration may indeed augur well.

Notably, even though more regulation and a reversal of tax cuts, bringing the rate up to 28 per cent, may initially hurt risky assets, a return to multilateralism shall reduce uncertainty in global affairs. Support for multilateral organisations such as the IMF, currently providing significant relief during such a turbulent period, and World Bank may well aid debt-ridden EM economies in need of financial support.

For Latin American economies, the implications brought about by a Biden administration shall vary.

Mexico – a country and topic which gathered significant interest during the 2016 US election, and is in many aspects interdependent with the US – for trade, investment, and migration, shall indeed benefit. Notably, a more unified US government shall be supportive of the Mexican economy, particularly from less uncertainty over trade policy. While under a Biden administration, immigration-related clashes are less likely to occur, environmental rattles are indeed plausible given Biden’s efforts towards cleaner energy and ultimately climate change.

Funded in part by tax hikes and fiscal stimulus, a Biden administration is expected to boost spending on both infrastructure and energy to support US growth.

Given that the US remains an important trading partner for Brazil, Latin American’s largest economy shall indeed benefit, with higher US growth implying better prospects for Brazilian exports, and thus a better outcome for the country.

In our view, we see a Biden win to generally benefit EMs, not just from a macro view in terms of enhanced trade relations and stability, when compared to that witnessed under Trump’s administration, but also from a micro perspective. In-line with Joe Biden’s electoral promises, we expect EM corporates to benefit from US infrastructural investment and fiscal stimulus.

In the short-term, as the US election edges closer and finally, takes more of a centre stage, after being overshadowed by the global health crisis, we do expect volatility in EMs to increase, presenting another round of attractive buying opportunities.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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