How are geopolitics impacting emerging markets?

Domestic politics, geopolitical rivalry, open conflict in Europe and rising tensions in Asia are increasingly reflected in trade, industrial, climate and national security policies. These factors are already impacting financial markets in ways that we believe will differentiate emerging markets (EMs) both geographically and ideologically.

We believe changing geopolitical environment is already causing structural shifts in global markets. Throughout the era of hyper-globalization¹, the dollar had been inversely related to commodity prices. Since 2021, however, this relationship has switched from inverse to positive, as it was before the Soviet collapse in 1991. Historically, when the US economy was strong with a closing or negative output gap, the Fed was tightening, and the dollar would rise. Because many EMs were dollar-pegged, they would import US policy through the greenback and commodity prices would rise with a softening dollar and vice versa.

As the international system has come under pressure, gold too has decoupled from its traditional valuation drivers, especially the dollar and US real interest rates. Historically, gold prices have had an inverse relationship with both interest rates and dollar but recently we noticed a recent switch to positive relationship. We believe this is largely due to de-dollarization efforts by some central banks.²

This does not imply we are heading for a Cold War 2.0. Instead, we see a revamp of globalization rather than deglobalization. However, it does seem clear that the US (and other major developed markets (DMs)) are seeking to reindustrialize to some extent. The US is experiencing an investment and construction boom because of fiscal support and industrial policy. 

We believe these changes in the global economic landscape are structural rather than temporary. Globalization aimed to enhance global stability by raising the costs of conflict through deeper supply chain integration. Russia’s invasion of Ukraine has undercut that concept, and the West has responded by seeking to isolate Russia. Similar outcomes might occur in other adversarial or rivalrous relationships but are unlikely unless there is a conflict. Yet, many major DMs and EMs are actively managing such risks by diversifying supply chains and sources of demand. As a result, EMs are experiencing less weakness from the stronger US economy and dollar than before. China and India are somewhat protected by capital controls and have delinked from the dollar to a significant degree. Brazil and South Africa stand to benefit when commodity prices rise.

Domestic and foreign policies are increasingly intertwined in both DM and EM economies. This can be evidenced in Biden/Trump tariff competition, UK Labour Party’s “Securonomics”, directly linking national security, economic security, and “Progressive Realism” in foreign policy, implying a values-based approach to hard-edged national interests. We believe this will create greater differentiation in growth and market performance. For example, Mexico and India seem well placed to benefit from geographic proximity and alignment to the US and West.

With the United States-Mexico-Canada Agreement (USMCA) review underway, Mexico may become even closer to the US with moves to reduce China’s role in US/Mexico supply chains. India’s economy is still highly domestic, yet also increasingly integrated with the US. Central/Eastern Europe is likely to integrate even deeper with the EU in response to many other EM countries.  Commodity exporters and those geographically distant from the US or Europe like Latin America or Africa are likely to maintain ties both to the West and China and Russia. Much of South-East and East Asia is likely to keep its options open given China’s proximity.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.