New year, same old Trump

Source: New York Magazine

  By Guest Blogger Doug Rowat

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There was a time when emerging markets were Bay Street’s sexiest investment.

In 2003, fuelled by rising commodity prices and a near-fanatical belief in China’s growth potential, emerging markets entered a five-year stretch of spectacular growth. 30%+ calendar-year returns became the norm.

Enter the 2008-2009 financial crisis and the party came to a crashing halt. And emerging markets struggled afterwards to get back on their feet. Over the next 15 years, emerging markets performance was highly uneven with the MSCI Emerging Markets Index having about as many down years as up years. It began to dawn on investors that the commodity super-cycle wasn’t all that super and that China wasn’t going to indefinitely grow its economy at triple or quadruple the rate of developed countries.

This volatile period for emerging markets resulted in many investors abandoning the space entirely.

However, now might be the time for a second look.

Like so many things in the world right now, the outlook for emerging markets depends on what you think Donald Trump’s going to do next. If you believe that his 2025 worldview will largely hold true in 2026 then emerging-markets exposure is essential. When clients ask for my best Trump hedge, emerging markets usually top the list.

Why?

Weaker US$ positive for emerging markets

First, the US dollar. While currency forecasting is notoriously difficult, it’s fair to say that the US dollar didn’t react well to Trump’s global trade war last year, dropping about 8% versus a basket of global currencies, a significant downside move for the US dollar. Therefore, if you believe that tariffs will continue to be a feature of Trump’s 2026 trade policy then further US-dollar weakness seems likely. We haven’t seen the precipitous drop in the US dollar this year like we did following last year’s startling Liberation Day announcement, but the greenback continues to drift lower as tariffs, in some form or other, appear to be here to stay.

So why is a weaker US dollar positive for emerging markets?

A weaker greenback reduces borrowing costs for both emerging-market governments and emerging-market corporations, essentially making repaying their debt less expensive. A weaker US dollar’s also beneficial for commodity prices, as purchasing these commodities, which are priced in US dollars, becomes more affordable for international investors, therefore driving up prices. Many emerging-market countries (Brazil, for example) are reliant on commodity exports.
As a result, there’s a strong inverse relationship between the US dollar and emerging-markets indices. In other words, if the US dollar weakens, emerging-markets stocks tend to move higher. The correlation between the DXY Dollar Index and the MSCI Emerging Markets Index over the past five years is negative 0.79, a meaningful inverse relationship:

When the US dollar zigs, emerging markets zag

Source: FactSet, Turner Investments

But it wasn’t all currency-related advantages that powered emerging markets higher last year.

Investors correctly surmised that a degraded global trading relationship with the US would drive developed countries to seek trading partnerships with emerging-market countries. PM Mark Carney’s recent trade deals with China are certainly a good example of this. Investors began to price in this shift in global trade. Will developed countries simply capitulate to Trump’s trade demands in 2026 or will they instead continue to try and establish more diversified trade? If your view’s the latter, then emerging markets have a role in your portfolio.

And the transition last year to emerging-markets equities became even more palatable given their already significant valuation discount to US equities. Despite their strong performance over the past year, emerging-markets equities still trade at a nearly 33% discount to large-cap US equities on a price-to-earnings basis and a more than 50% discount on a price-to-book basis. And it turns out that emerging markets are also rich in technology and AI-related exposure but offer that exposure at far more attractive valuations.

Finally, there’s the change in relative-strength leadership. After outperforming the MSCI Emerging Markets Index for most of the past 10 years, the S&P 500 has now lost that leadership position and is underperforming. Proponents of relative-strength analysis argue that outperformance (or underperformance) persists. And, if you can correctly identify an inflection point, the new trend is likely to last. Relative-strength signals aren’t infallible, but the sharp downside break of the S&P 500’s years-long uptrend versus the MSCI Emerging Markets Index is hard to ignore:

The S&P 500’s outperformance of the MSCI Emerging Markets Index has come to an abrupt halt.

Source: FactSet, Turner Investments

As 2026 rolls on and we continue to await the booming prosperity that Trump’s tariffs were supposed bring, ask yourself whether Trump will now soberly reflect on his trade policies, admit to errors in judgement and prudently change course in 2026?

If you can stop laughing long enough to answer no, then, once again, include emerging markets in your portfolio.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/02/28/new-year-same-old-trump/