Analysis to Trump Weather, Emerging Market Investors Look to Limits by Reuters

Written by Libby George

LONDON (Reuters) – A new era of unpredictability, marked by tariff threats and rising global tensions, is giving emerging market investors to seek shelter in frontier markets that are relatively safe from U.S. President Donald Trump’s trade policy shifts.

Trump’s return to the White House has put Mexico’s peso on a roller coaster, more enthusiasm for foreign investment in China and chilled hopes for a golden era for emerging markets.

The so-called frontier markets are the most risky in EM and are often the smaller developing economies in Africa, Eastern Europe, Asia and even Latin America. They’re not exactly safe, but investors say they’re solid investment destinations this year because they’re not in Trump’s firing line for tariffs and other policy shifts.

Economies like Serbia have the added appeal of strong growth, while for Ghana, Zambia and Sri Lanka, the emergence of debt allows them to focus on reforms and growth.

“Border markets are probably going to be more isolated than others, because I don’t think countries like Nigeria or Sri Lanka or Paraguay… are going to be a target anytime soon by this administration,” said Thierry LaRose, an emerging market expert. Portfolio manager with Vontobel.

“They have their own risks, but they are largely immune to the risks that affect mainstream emerging markets,” he said, calling them “a very powerful driver of diversification.”

For Anton Hauser, a senior fund manager at Erstest Asset Management, assets such as Serbian local bonds are good bets to capture economic growth in Eastern Europe.

High return and high performance?

A riskier global climate often sends investors rushing to safe-haven Treasury assets such as US Treasuries or gold or German government bonds.

The Covid-19 crisis and fallout from Russia’s invasion of Ukraine have seen investors ditch frontier markets in their flight to safety; Many of them landed in sovereign default.

But the backdrop may be different with Trump’s mercurial second presidency.

Some of the riskiest debt bets — such as Argentine, Lebanese, Ukrainian and Ecuadorian eurobonds — outperformed spectacularly last year.

Many expect private equity stories – mainly driven by local dynamics – to once again weigh on returns from 2025.

Nick Essinger, co-head of emerging markets with Vanguard, said, adding: “High yield has done well overall — it’s been doing well for a few months now.

Like Larose, he cited frontier markets, particularly in Africa, as “unlikely to be systematically affected by geopolitical or global macro factors.”

Investors cited several other countries – many of which have struggled to attract foreign cash – including Egypt, Nigeria and the Dominican Republic – as good targets.

Zambia, Ghana and Sri Lanka, which recently exited debt restructuring deals, are also attractive bets this year, they said.

But there are some bright spots among larger, non-established emerging economies as well, such as Türkiye and South Africa.

Türkiye has been a popular play on foreign exchange since its return to orthodox fiscal policy in 2023, and has recently embarked on a rate-cutting cycle and could benefit from reconstruction in Syria and Ukraine.

Investors said South Africa is less dependent on exporting to the United States, could benefit from lower oil prices and has a mix of commodity exports that could help it weather geopolitical turmoil.

“The few trades that… surprised the last few weeks were low beta, low correlation trading with the dollar,” said Marek Drimal, CEEMEA strategist with Societe Generale (OTC): “Türkiye is a prime example. They were fine.”

Drimall also cited bets on forex raiders in Egypt and the Treasury in Kenya.

But it is not a free pass for all emerging economies.

JPMorgan lowered its recommendation on Panama bonds after Trump increased his threat this week to “take back” the Panama Canal.

The silver linings from the previous Trump administration may be less fortunate this time around as well, especially those who benefited from Chinese carryover trade.

“Mexico, Vietnam, Malaysia… will be more targeted,” said Magda Branet, head of emerging markets with AXA Investment Managers. “Trump will look to close these loopholes.”