US election
The next US Presidential election will have its say on energy policies and on the climate. Middle East investors need to prep for these in advance. Image Credit: AP

2024 will be a global election year as countries that are home to nearly half of the world’s population go to the polls. Among them is the US, where presidential elections are scheduled to take place on November 5.

The campaign will be closely watched by investors given the country’s role as a global growth engine and relevance to capital markets. And since US Presidents enjoy a great deal of autonomy in managing foreign and national security affairs, the results are also highly relevant for businesses and investors in emerging countries.

Understandably, investors are anxious to know how a specific election result would affect their portfolio. After all, campaign rhetoric and policy platforms often target specific sectors and regions, with potential short- to medium-term implications.

However, long-term investment decisions should be treated as an apolitical exercise. Political biases can prove harmful, for example, by encouraging risk-averse behavior just when asset prices are undervalued, and market opportunities are attractive.

Let’s look at the different channels how the US election could impact emerging markets.

First and foremost is China. Tensions between Washington and Beijing approached boiling point during Donald Trump’s administration after it imposed widespread trade and investment restrictions, as well as numerous sanctions against China.

Under the Joe Biden presidency, a few measures were intensified, and his administration shied away from removing existing ones. We would not be surprised to see further efforts to limit China’s access to US technology and discourage US companies from engaging in cross-border capital flows into China.

The wider use of import tariffs might be expected in a Trump victory. The former president already announced intentions to introduce additional tariffs on imports from all US trading partners, eyeing China for more significant increases.

In such a scenario, the People’s Bank of China might again allow the renminbi to weaken against the US dollar to dampen the impact on local exporters. While likely harmful to global trade, we think markets would differentiate between the relative winners and losers.

Climate change priorities

Since the inception of the US Inflation Reduction Act in 2022, US auto imports from China have declined significantly in favor of imports from Mexico. The latter, along with other emerging markets such as India and Vietnam, also seem to have benefited from increased foreign direct investments, as global companies intensify their efforts to diversify their supply chains.

The Middle East is exposed to different policy emphases. As the region relies on hydrocarbon exports, US energy policies can have a significant effect on its outlook. A second Biden term would likely continue to focus on climate change, encouraging a transition to renewable energy.

A Trump presidency, on the other hand, would likely aim to cut expenditures related to the Inflation Reduction Act and remove barriers to fossil fuel development, although a Republican control of Congress would be necessary for this to occur, and even then, it might still encounter opposition.

The long-term drive toward carbon neutrality should provide structural support to companies exposed to the energy transition, in both public and private markets. We expect the wave of disruption rippling across the energy, technology, and healthcare industries to benefit investors who can successfully identify the companies that are exposed to these disruptions.

Despite a lot of noise around the conflict in the Middle East, especially pertaining to Iran, Trump and Biden may not be that far apart when it comes to US security commitments to the GCC.

Overall, we think the security of the region will remain a priority for either presidency: The Trump administration brokered the Abraham Accords, which focus on normalizing diplomatic ties between Arab nations and Israel, while the Biden administration continues to try to avoid an escalation of the war and to broker a peace agreement.

Shifts in US energy stance?

At the same time, regional security in the Middle East might play a less important role in US politics in the years ahead given the US’s advanced stage toward energy independence. In this light, countries in the region have stepped up their efforts to increase stability and to look for other allies.

To conclude, we think possible changes in US policies will create relative winners and losers among emerging countries. At the same time, we caution against relying on political biases for longer-term investment decisions. US policy decisions don’t happen in isolation.

Rather, they trigger responses and adjustments. Meanwhile, bilateral trade between emerging economies is flourishing, with China and other BRICS nations promoting their own currencies for such trade. Hence, we remind investors that emerging market assets should play a firm role in a well-diversified portfolio.

Amid an environment where central banks will start to cut policy rates and growth is holding up well, hiding in cash instead of being invested can be a costly decision, despite the possible market turbulences in the run-up to November 5…