A Biden presidency without blue wave may still be a win for emerging markets

By Selcuk Gokoluk

A Joe Biden presidency, checked by a Republican-controlled Senate, may be just what emerging-market investors are looking for.

While the Democrat is seen pursuing policies conducive to trade and the environment, a divided Congress may stop him from firing a fiscal bazooka. That means more exports and faster growth for developing nations, as well as a boost for riskier assets from a more accommodative Federal Reserve, according to investors and analysts.

Emerging-market stocks are heading for their best weekly performance in five months after a turbulent week dictated by the possible outcomes to the U.S. presidential election. Investor demand for riskier assets has risen amid speculation that Biden will win the presidency. With the final result still uncertain, U.S. policy makers left interest rates near zero on Thursday and made no change to asset purchases.

The MSCI emerging-market stock index gained for a fifth day on Friday, solidifying the highest level it reached since 2018 and erasing all its post-pandemic losses the previous day. While counting continued in the U.S., a similar measure of developing-nation currencies added 0.2%, paced by the Indonesian rupiah and the Thai baht. The Turkish lira bucked the trend, weakening the most among EM currencies.

Here’s what market participants had to say:

Charles Robertson, chief global economist at Renaissance Capital in London:

It’s arguably the best news since the taper tantrum of 2013 and commodity price collapse of 2014 hit many in emerging markets so hard. EM debt and currencies should perform very well. The big problem in recent years was dollar strength driven in part by Trump’s protectionism. Fewer trade wars should reduce the bid for dollars, allowing currency appreciation, and improving external debt ratios to gross domestic product.

Charles Diebel, money manager at Mediolanum International Funds in Dublin:

It means that you have a president who is more normal in his approach to trade. EM is supported by its correlation to weaker USD, so it is good for exports. With U.S. Treasuries likely to be in a range, it allows EM to adopt a slightly more dovish tone and will see inflows on a yield pick-up basis.

Simon Harvey, a foreign-exchange analyst at Monex Europe in London:

You will see some currencies outperform -- notably the Mexican peso and Chinese yuan -- from a reduced trade risk. We’ll see a marginal boost to risk appetite. EM currencies will also receive some tailwinds from lower U.S. yields and protracted expectations of the Fed normalizing policy. This favors the rand and Latam currencies.

Magdalena Polan, global emerging-market economist at Legal & General Investment Management in London:

I would expect less headline risk and lower volatility. I would expect President Biden and his team to be more predictable than Trump, and more prone to a multilateral approach. But attempts to limit China’s impact on the U.S. economy will likely continue as they have bipartisan support.

Kerry Craig, global market strategist at JPMorgan Asset Management in Melbourne:

The implications of a widening U.S. deficit, possibly more predictable U.S. foreign policy, and lower bond yields is a weaker U.S. dollar. All of which are positive for emerging markets, and notably, Asian assets. Meanwhile, as inflation expectations reduce and the anticipated rise in yields in DM government bond markets are capped further, it will be emerging-bond markets where investors seek out income and relatively higher spreads.

Luca Paolini, chief strategist at Pictet Asset Management in London:

A Biden win with a split Congress is perhaps the best outcome for riskier asset classes in the medium term. Trump’s corporate tax cuts will stay in place, while fiscal stimulus should turn out to be sufficient, not excessive. What is more, policy making should become less erratic with Biden in the White House, which could reduce stocks’ risk premium over time.

Kunjal Gala, lead global emerging markets portfolio manager at Federated Hermes in London:

A Biden Presidency is likely to be pragmatic with a focus on globalization and hence positive for emerging markets. However, pressure on China is likely to be sustained as Biden could possibly unite with allies to counter China. Regardless of the political outcome, the emerging market structural growth opportunity remains intact, driven by an aspiring, growing middle class, rising digitization, reforms and infrastructure development.

Zhikai Chen, head of Asian equities at BNP Paribas Asset Management in Hong Kong:

In the event of a Biden victory, it will potentially bring relief to Asian equity investors as U.S. policies will likely return to the prior norm versus the current administration’s unpredictable tactics. This reduces the political and policy uncertainties between the two largest economies and allow investors to focus more on company fundamentals. We are mostly invested in companies where we have very good visibility on the earnings outlook and derived the vast majority of their revenues from domestic demand.

Trieu Pham, a strategist at ING Groep NV in London:

Local currency bonds (mainly long-end) are likely to do better now versus the “blue wave” scenario, given the more limited scope for higher long-end UST yields. This should be particularly the case for low yielders, be it central and eastern Europe or EM Asia.