Emerging Markets Gain Despite Trump Tariffs, Earnings Lag

Emerging markets have shown robust performance this year, with the benchmark MSCI Emerging Markets Index recording monthly gains. This trend is reminiscent of similar periods in 2017, during the first year of Trump's presidency, and in 1993, under Clinton's administration. However, the influx of capital into these markets does not necessarily signal a bright future.

On Wall Street, there is a growing concern that Trump's tariff policies are taking a toll on businesses in emerging markets, potentially threatening future earnings. Financial reports from these markets indicate that corporate profits have generally fallen short of expectations, marking the 13th consecutive quarter of underperformance. Additionally, companies are becoming increasingly conservative in their earnings forecasts, reflecting a decline in business confidence.

Nenad Dinic, a stock strategist, has expressed caution regarding emerging market equities due to the ongoing risks associated with tariffs. Following a 90-day tariff suspension, the expected earnings per share for 2025 have once again declined, indicating worries about intensified tariff pressures in the second half of the year.

Tariffs are just one variable in the complex web of Trump's policies, with other factors subtly reshaping the market landscape. Many emerging market fund managers had anticipated a strong U.S. economy and a sluggish performance from emerging market stocks. The tariffs were expected to drive up inflation within the U.S., delaying the start of the Federal Reserve's easing cycle.

However, recent dovish remarks from Federal Reserve officials have increased the likelihood of rate cuts for the remainder of the year, weakening the dollar and boosting investor sentiment in emerging markets. Conversely, Trump's immigration and trade policies, along with the overall policy uncertainty, have prompted global investors to seek alternatives to the U.S., leading to capital outflows from American investments and inflows into emerging markets.

Hasnain Malik, a strategist, noted that the primary benefit of Trump's administration for emerging markets has been the depreciation of the U.S. dollar. Ironically, concerns over the erosion of checks and balances in the U.S. have driven capital into emerging markets.

Despite these positive developments, emerging markets are not without risks. Many companies within the MSCI Emerging Markets Index reported lower-than-expected profits in their latest quarterly earnings, particularly in sectors like commodities and industrials, which are export-oriented. The gap between expected and actual profits averaged 11%.

Dinic warned that investors may not yet have seen the full impact of Trump's tariff measures, as companies accelerated their exports to the U.S. before the tariffs took effect. For emerging market earnings, this implies that the risk outlook is likely to become more downside-biased over time.