While Trump’s potential fiscal stimulus could boost U.S. growth, it will not be sufficient to offset the negative impact on EM from poor local fundamentals, a stronger dollar and rising Treasury yields.
From a historical perspective, firm U.S. growth has not been a panacea for EM, particularly when the latter’s domestic fundamentals are poor and commodities prices are falling. For example, EM in general and emerging Asia in particular collapsed in 1997/98 when U.S. real GDP growth was averaging 4.5% (and European growth was 3.5%). U.S. import volumes were booming at double-digit rates, but this was insufficient to circumvent the crisis in Asia.
Further, the U.S. and Europe were dominant sources of global demand in the 1990s and China was not at all an economic power. Since the turn of the century, the significance of China has grown enormously, while the importance of the U.S. and Europe with respect to global demand has fallen.
In short, an outlook for stronger U.S. growth is not a reason to turn bullish on EM. Growth prospects and fundamentals in EM have not improved. Meanwhile, a stronger U.S. dollar and rising Treasury yields will attract global capital flows and pressure commodity prices. This will leave EM current account deficit countries exposed and EM carry trades at risk of unraveling.