U.S. President-elect Donald Trump's proposed policies pose a major risk for emerging markets, analysts say, as his pro-growth and protectionist policies should support the U.S. dollar. Strength in the greenback is a negative for emerging market countries, whose large holdings of dollar-denominated debt become more expensive to pay off.
Analysts generally still expect the dollar to strengthen, although Trump's recent comments on taxes and trade have sent the dollar index to its lowest in a month.
Since investors began looking at emerging markets in the 1980s, "we've made certain assumptions about trade. That may or may not change," said David Polak, equity investment specialist at Capital Group. Will it be a "war of words or a challenge to the trading fabric?"
"That's important for Mexico and emerging markets that have grown up in a period of relatively open trade," he said.
Trump's repeated antagonism toward Mexico has repeatedly sent its currency to fresh all-time lows against the dollar. Looking across the Pacific, the president-elect has selected outspoken China critics for top positions on trade, indicating to many analysts that the U.S. will likely take a tougher stance against the Asian giant.
"We saw more positivity last year in part because of more sanguine Asia or China data that was coming out," said Adrian Helfert, head of global fixed income at Amundi Smith Breeden. "Now that people are reviewing their assumptions, now that Donald Trump is going to be our president let's see how realistic all that rhetoric is going to be."
The world's second-largest economy plays a major role in sentiment around emerging markets. Chinese stocks also make up more than a quarter of MSCI's emerging markets index.
"In 2017, we're still looking at a picture of general economic recovery across the emerging markets world. … On the negative side, we're still expecting growth in China to slow down," said Louis Lau, director of the investments group and a member of the emerging markets investment committee at Brandes Investment Partners.
"The impact of China in '16 and '17 and maybe the next few years is going to cast a shade on emerging markets," Lau said. He has less than half benchmark allocation to China.
China's economic growth and politics are particularly in focus this year as Chinese President Xi Jinping is expected to consolidate his power at the Communist Party congress in the fall.
But at least for the next 12 months, the trade discussion should bring volatility but not fundamental reasons for a decline in emerging market assets, said Atilla Yesilada, local partner in Istanbul for emerging markets investment consulting firm GlobalSource Partners.
"To me 2017 is a transition year. … This year there will be a lot of smoke but no fire," he said.