What investors can do as US market grows stronger under Trump

US president-elect Donald Trump speaks as he is interviewed by Bloomberg Editor-in-Chief John Micklethwait at the Economic Club of Chicago in Illinois, US, on October 15, 2024.

Photo credit: Reuters

Now that the US president elect, Donald Trump, has won back the keys to the White House, what does that mean for emerging markets?

The big issue seems to be whether emerging market returns are enough to entice US investors (plus other international funds) from a likely comfortable “home bias.”

A Trump residency is seen strengthening the US dollar, with investors expecting his policies to lead to higher inflation. This in turn may force the Federal Reserve to keep higher rates to keep the economy from overheating. Ultimately, this should keep the US dollar and its home markets stronger.

Outside the US, not much can be said. Year to October 31, the MSCI Frontier Markets Africa Index, which captures 12 frontier markets in Africa covering approximately 85 percent of the free float-adjusted market capitalisation in each country, has underperformed the MSCI USA index by more than 50 percent.

Similarly, both the MSCI Emerging Markets and MSCI World indexes are underperforming the US market by over 15 percent on average this year.

Pundits agree more outflows from emerging markets will continue to support US markets during Trump’s presidency.

Trump’s plan to cut the corporate tax rate to 15 percent from 21 percent would certainly be positive for the S&P. Therefore, odds for a weaker dollar environment that set the ground for US money to flow overseas look increasingly low. A tough trade in 2025.

But not to be downbeat, there’s something investors can do. There’s a myriad of off-shore funds available sold locally. Whether exchanged trade funds or mutual funds, choose those with heavy bias towards North American markets. Preferably, go for those with funding currency in US dollars.

Interestingly, in the week ending November 7, a few days after Trump’s win, the US dollar index strengthened by 0.51 percent against a basket of major currencies; could that be the market signalling? Ceteris paribus (all other things being equal), all these bets should benefit from the projected outperformance as consensus shows.

That said, as in all things, proceed cautiously. No one guarantees Trump’s plans will sail through Congress. As Warren Buffet would say, “you pay a very high price in the stock market for a cheery consensus.”

Nonetheless, the relentless underperformance of African markets and that of wider emerging equity indexes against the US doesn’t paint a pretty picture.

Although emerging markets are on the rise, with all the 24 main markets projected to grow in 2025 according to the International Monetary Fund, attracting capital remains tricky.

Some see the rate differentials as appealing in favour of the US. Specifically, as markets expect emerging economies to press forward on easing cycles while the US is set to hike; this makes high-yielding junk-rated emerging market credits and frontier market yields less comparable to yields on US private credits. Might this explain why our Kenyan Eurobond yields have trended upwards since May 2024?

Anyway, maximising your portfolio returns in 2025 increasingly means looking to the US.

Mwanyasi is MD, Canaan Capital

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