(Bloomberg) -- Investors are underestimating trade war risks under a Donald Trump presidency, according to strategists at Bank of America Corp. who predict a 5% slide in emerging-market currencies over the first half of 2025, and a selloff in sovereign debt.
BofA strategists led by David Hauner expect China’s yuan to bear the brunt, seeing the Chinese currency sliding to 7.6 per dollar in the first half of next year, should the incoming US administration impose 40% tariffs on Chinese goods. A heftier 60% levy would imply the yuan at 8 per dollar, versus current levels around 7.24, they add.
That would ripple across to other emerging-market assets, Hauner said in a note entitled: “Stay bearish!” While EM currencies could slide 5%, lower oil prices could weigh on high-yield sovereign debt, widening spreads by as much as 100 basis points, he predicts. Just as in the 2018 trade war, “capital outflows from EM and higher risk premium should occur.”
“Markets are not only complacent about the size of the tariffs, but also about their side effects on global growth and potential to trigger a hard landing,” Hauner wrote, noting the new tariffs would come at a time when economic activity is already much weaker than in 2018.
The MSCI index for emerging-market currencies has weakened about 1% since Trump secured his return to the White House, amid fears of additional trade tariff and signs of escalation in the Russia-Ukraine war. Eastern European currencies have taken the biggest hit.
If the trade war narrative plays out, a contrarian buying opportunity could emerge in some emerging market assets, according to BofA, which sees the dollar peaking in the first quarter. For now, however, the strategists recommend buying the dollar against emerging-market currencies, particularly versus the yuan and South African rand. They also like local bonds from Brazil, Hungary, Poland, and Turkey but advise waiting for the dollar to peak in early-2025.
©2024 Bloomberg L.P.