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Monday, 15 February 2021

Biden administration: Boon or bust for EM?

How much of a boon is the Biden presidency going to be for emerging economies? The general consensus among analysts and investors is that Donald Trump’s departure and Joe Biden’s arrival at the Oval Office will bring good things for emerging and frontier markets. This view is amplified by the rollout of vaccination programs in the US and other major economies, which will reverberate and have spillover effects on EM and FM.

The expected upsides: Biden’s anticipated easing of Trump-era trade tensions and reversal of FDI flows back towards emerging and frontier markets are expected to help drive up EM FX strength and suppress their inflation and interest rates, which Renaissance Capital said in November will spur faster growth and attract more money. Standard & Poor’s echoed the same sentiment, saying last month (pdf) that investor appetite for EM is growing on the back of the election results, with the expectation of more stable and predictable policies under the Biden administration. “This is leading to a rise in capital flows to EMs, alongside appreciating currencies and easing of financing conditions.”

Some pundits don’t think that Biden is actually going to undo all of Trump’s protectionist policies, including Schroders’ senior emerging markets economist David Rees, who says these policies — particularly as they pertain to China — are more popular among both Republicans and Democrats. That being said, Rees does see a “return to more traditional and predictable policymaking” and a departure from “social media diplomacy” under Biden’s helm, which is expected to bolster investor confidence in EMs.

And there’s divergence on just how quickly positive effects will take hold — and how long they will last. There was already a market rally at the tail-end of last year, but the bull run could stumble in the short run, particularly among concerns that the current valuations in EM stocks are “unsustainable.” Based on technical patterns that have successfully anticipated sell-offs in the past indicate that EMs aren’t due to enter correction territory yet, “with the MSCI Emerging Markets Index’s charts still short of levels that coincided with performance peaks.” However, the spread between where the gauge is currently at and the “trigger points” is rather narrow.

There’s also the risks that have nothing to do with who’s in office across the pond, like the continued rise of covid-19 cases in developed economies and EM alike, which “are holding back global economic activity over the short run,” S&P said (pdf). Even with vaccine programs being rolled out, there needs to be an equitable and effective distribution of the jabs for this development to change the outlook for EMs, particularly as “the short-term outlook still looks challenging.”

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