Starting with trade, several forces may reshape investment opportunities

Markets celebrated Trump’s November victory, anticipating a surge in mergers and acquisitions (M&A) activity, deregulation, lower taxes, and pro-business policies. What they have seen has not followed the expected script, but there are potential opportunities emerging.

In the first five months of the Trump administration, we have seen a shake-up in global policy norms, severe equity market volatility following “Liberation Day” that was reminiscent of the early days of COVID, and an escalation of tariffs with China to an eye-popping 145 per cent.

Despite a spike in uncertainty 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 over-capacity. 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 characterise 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.

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 co-ordinated policy response to China’s industrial practices. By harmonising 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, aluminium and solar.

If successful, this effort could mark a turning point in global trade dynamics — one that favours market-based production over state-backed over-expansion. 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 per cent of gross domestic product (GDP).

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 in US assets after years of outperformance would lead to capital flowing back into under-valued or overlooked markets.

Additionally, EM may be well positioned to benefit from a secular shift in global production and capital flows. US policy aimed at curbing state-subsidised over-capacity may accelerate the relocation of supply chains toward other markets, including EM economies. This trend could catalyse 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.

Asia: Currency opportunities and risks

In Asia, investor opportunities could favour foreign exchange (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 destabilising currency adjustments if hedging behaviours 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, defence, 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.

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.

Michael Arno is a portfolio manager and senior research analyst at Brandywine Global, an investment affiliate of Franklin Templeton Investments.