Could Trump's tariff policies boost emerging-markets stocks?

Many investors believe that stiffer tariffs and a stronger U.S. dollar under President Donald Trump would put more pressure on emerging-markets economies, but Fidelity's Sam Polyak offers a different perspective.

• As counterintuitive as it may seem, Fidelity Portfolio Manager Sam Polyak thinks potential policy changes under the new presidential administration could lead to a more-debt-laden U.S. economy, which, believe it or not, makes a potentially compelling case for investing in emerging-markets stocks.
• "If the U.S. implements all of Donald Trump's campaign promises, the combination of lower revenue from tax cuts and higher spending could push the U.S. debt-to-GDP ratio from an estimated 99% in 2024 to 150% by 2034 according to a recent article in The Economist," explains Polyak, who manages Fidelity Advisor^® Focused Emerging Markets Fund. "This significant increase in debt could lead to U.S. dollar weakness, potentially motivating investors to seek investment opportunities elsewhere, particularly in emerging markets."
• He adds that even if no policy changes were implemented, the ratio likely would still rise, but Fidelity's research indicates that it would be 16 percentage points higher under Trump.
• In managing the emerging-markets equity strategy, Polyak employs a growth-at-a-reasonable-price approach in targeting businesses benefiting from long-term secular drivers.
• But what about the hot topic of tariffs? he asks. While the prospect of new tariffs on Chinese goods might seem daunting, Polyak believes the actual impact will be less severe than anticipated.
• "In fact," he says, "20% is a much more reasonable estimate, in my view, with the proposed 60% figure being more of a negotiating tactic."
• Even at 20%, however, Polyak expects that new tariffs could prompt stimulus measures from China, potentially boosting a wide range of Chinese stocks.
• Tariffs aside, the untapped potential of consumer spending in China appears to be vastly underestimated, according to Polyak.
• For example, he notes that despite representing only 18% of global gross domestic product in 2022, China's share of global consumption is relatively low, at 13%, whereas its share of global investment stood at 32%.
• Moreover, domestic consumption accounted for just 33% of the nation's GDP in 2022. Polyak highlights that this is significantly lower than the roughly 70% for most industrialized economies, including the U.S., meaning there is significant upside potential as China's middle class continues to expand.
• "At the end of 2024, emerging-markets stocks were trading near their lowest levels relative to U.S. shares since at least 1990," he says. "I believe this meaningful valuation gap is likely to reverse soon, presenting a unique opportunity to capitalize on the growth potential of emerging-markets stocks."