CONTRIBUTORS
Michael Arno, CFA
Portfolio Manager & Senior Research Analyst,
Brandywine Global
Markets celebrated Trump’s November victory, anticipating a surge in mergers and acquisitions (M&A) activity, deregulation, lower taxes, and pro-business policies. However, in the first five months of the administration, we have seen a shake-up in global policy norms, severe equity market volatility following “Liberation Day” reminiscent of the early days of COVID, and an escalation of tariffs with China to an eye-popping 145%. Despite a spike in uncertainty (see Exhibit 1) and falling polling numbers, the Trump administration continues to press forward with its efforts to reconfigure the global trade architecture. Its aim is to counter what it views as systemic imbalances, chiefly those stemming from China’s state-directed industrial overcapacity. The administration’s strategy marks a shift from past multilateral trade frameworks toward a more assertive agenda, designed to level the competitive landscape and mitigate the distortions caused by non-market economies. Over the coming months, will we learn if the small yard and high fence, a metaphor used by former National Security Advisor Jake Sullivan to characterize the need to protect critical competencies while still maintaining broad economic ties with China, still holds. Instead, a more aggressive trade rebalancing coupled with the cyclical and structural dynamics that are underway may expand opportunities in other emerging markets.
Exhibit 1: Uncertainty Spikes in the United States
As of April 30, 2025
Sources: Brandywine Global, Macrobond, Economic Policy Uncertainty, The Conference Board. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
In alignment with this rebalancing strategy, Treasury Secretary Scott Bessent is zeroing in on the 14 most strategically significant US trading partners, seeking to foster a coordinated policy response to China’s industrial practices. By harmonizing standards and enforcement mechanisms across these relationships, the administration’s goal is to prevent regulatory arbitrage and increase pressure on Beijing to reduce excess capacity across a number of sectors, such as steel, aluminum, and solar. If successful, this effort could mark a turning point in global trade dynamics—one that favors market-based production over state-backed overexpansion. A greater degree of decoupling in global trade dynamics may lead to a larger yard and higher fence than under the prior administration, potentially creating opportunities for other countries.
At the same time, financial markets are contending with the implications of a historically elevated US dollar real effective exchange rate (REER). Years of capital inflows into US assets spurred by higher real yields, fiscally supported economic outperformance, and geopolitical uncertainty around the globe pushed the dollar to extended levels. While this US “exceptionalism” dynamic kept domestic financial conditions relatively loose, it also exacerbated America's negative net international investment position to nearly -64% of gross domestic product (GDP) (see Exhibit 2).
Cyclical, structural, and secular tailwinds for Emerging Markets
We see two potential drivers that could be a natural release valve for the dollar and a benefit for emerging markets (EM). On a cyclical basis, US growth is looking less exceptional as domestic fiscal stimulus recedes compared to the fiscal expansion expected to drive growth in other parts of the world. On a structural basis, a rebalancing of global portfolios from investors overweight US assets after years of outperformance would lead to capital flowing back into undervalued or overlooked markets.
Exhibit 2: US Faces Negative NIIP and Elevated Dollar
Index (right), % of GDP (left), As of April 30, 2025
Sources: Brandywine Global, Macrobond, Federal Reserve, US Bureau of Economic Analysis. NIIP is the net international investment position difference between the external financial assets and liabilities of a country. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
Additionally, EM may be well positioned to benefit from a secular shift in global production and capital flows. US policy aimed at curbing state-subsidized overcapacity may accelerate the relocation of supply chains toward other markets, including EM economies. This trend could catalyze investment opportunities in infrastructure, local manufacturing, and upstream commodities across Asia, Latin America, and Africa.
Latam: High real yields, supply chain shifts, and reforms
Latin America, in particular, stands out not only for its exposure to this realignment but also for offering some of the highest real yields globally, presenting a compelling value proposition for fixed income investors. As we approach major election cycles in Chile, Peru, Colombia, and Brazil in 2025 and 2026, there is growing anticipation of a political pivot from the current wave of left-leaning administrations to more centrist, pro-market leadership. Such a shift could reinforce investor confidence, unlock reforms, and drive further capital inflows into the region, amplifying the economic benefits tied to global supply chain diversification.
Exhibit 3: Latin American Yields Remain Attractive
As of May 13, 2025
Sources: Brandywine Global, Macrobond, Bloomberg (© Bloomberg Finance LP), JP Morgan. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
Asia: Currency opportunities and risks
In Asia, investor opportunities could favor currency (FX) markets. However, many institutional investors in the region hold substantial US dollar assets, much of which remain unhedged. These holdings have created significant latent FX exposure that could result in rapid and potentially destabilizing currency adjustments if hedging behaviors change suddenly. Taiwan recently illustrated this dynamic, where a shift in hedging flows triggered sharp appreciation in the local currency. US Treasury Secretary Bessent may have to ease off on requiring immediate currency adjustments as part of trade negotiations. Otherwise, there is a risk of financial market headwinds. As rate differentials narrow and dollar strength fades, FX volatility in Asian markets may rise, creating tactical opportunities for investors with the flexibility to navigate these dislocations.
Central Europe: From austerity to growth
Central European markets, including Hungary, Poland, and Czechia, also present asymmetric upside as global investment flows begin to rotate. These economies are well positioned to benefit from a departure from Europe’s recent economic stagnation, especially if fiscal stimulus and targeted industrial policy gain traction. Former European Central Bank (ECB) President Mario Draghi recently underscored this need in a widely noted speech, calling for a step-change in European investment, particularly in green energy, defense, and digital infrastructure. As European Union (EU)-level policy begins to shift from austerity toward activation, Central Europe may emerge as a key beneficiary of both domestic growth impulses and supply chain reorientation from Western Europe and Asia.
Conclusion: Starting with trade, several forces may reshape opportunities
We could be witnessing a restructuring of global trade arrangements that have been in place for several decades, so these developments merit close monitoring. The interplay between policy-driven trade realignments, cyclical relative growth shifts, structural capital flow adjustments, and relative currency valuations could open new avenues for alpha generation while reshaping global risk premia. As global trade norms are rewritten, we believe, taking advantage of these macro trends may offer both strategic diversification and enhanced return potential. During the current 90-day tariff pause with China, we will be focused on the progress of trade negotiations with other large trading partners, including South Korea, Japan, India, and the EU, looking for clues on how significant these changes could be and the implications for EMs.
Index Definitions
The US Economic Policy Uncertainty Index reflects scaled frequency counts of articles in 10 leading newspapers. To construct the modern portion of the index (1985-present), monthly searches are conducted of each paper for terms related to economic policy uncertainty. In particular, the search looks for articles containing the term 'uncertainty' or 'uncertain', the terms 'economic' or 'economy' and one or more of the following terms: 'congress', 'legislation', 'white house', 'regulation', 'federal reserve', or 'deficit'.
The US Trade Policy Uncertainty Index is one of the category-specific Economic Policy Uncertainty (EPU) indexes developed in "Measuring Economic Policy Uncertainty" by Scott R. Baker, Nick Bloom, and Steven J. Davis. It reflects the frequency of articles in US newspapers that discuss policy-related economic uncertainty and also contain one or more references to trade policy.
The Consumer Confidence Index® is a survey, administered by The Conference Board, that reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes, buying intentions, vacation plans, and consumer expectations for inflation, stock prices, and interest rates.
The Trade-Weighted US Dollar Index, also known as the Real Broad Dollar Index, was created by the Federal Reserve (Fed) to measure the value of the US dollar (USD) relative to the currencies of its trading partners. Weightings are determined by the share of trade with each country, with the five largest allocated to the euro, Canadian dollar, Chinese yuan, Japanese yen, and Mexican peso. These five currencies account for over two-thirds of the index.
The JP Morgan Government Bond Index-Emerging Market Global Diversified Index - Latin America (GBI-EM Latin America) includes all of the local currency-denominated, regularly traded, liquid fixed rate, domestic currency government bonds issued in the Latin American countries represented in the JP Morgan Government Bond Index-Emerging Market Global Diversified Index.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
US Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the US government. The US government guarantees the principal and interest payments on US Treasuries when the securities are held to maturity. Unlike US Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the US government. Even when the US government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically.
The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
WF: 5459063