EM markets stabilise after post-Trump sell-off

Financial markets across the emerging world have stabilised following an initial sell-off in the wake of Donald Trump’s victory in the US presidential election earlier this month. This partly reflects a more conciliatory tone from the president-elect, which has helped to calm fears that some of the more incendiary campaign rhetoric on trade would become a policy reality. But it also makes sense given that the external vulnerabilities of most EMs has diminished over the past couple of years. One specific concern is that looser fiscal policy in the US will require monetary policy in the US to tighten – and the resulting rise in yields will make it harder for EMs to finance current account deficits. But the risks here have receded since the Taper Tantrum in 2013, with deficits narrowing in all of the so-called “Fragile Five”. Instead, external vulnerabilities now appear isolated to a small handful of EMs – namely Turkey, Peru and Colombia. Of course, risks still exist – with the threat that President Trump resorts to trade protection at the top of the list. But our sense is that this will become a bigger risk in the second half of his presidency. In the near term, we are not rushing to slash our EM forecasts.