As the dust settles on the US election, it looks like the risk of an explosive and protracted contest has faded. While we will still have to wait for the Georgia runoff in early January, a Joe Biden presidency with a split congress departs from the pre-election consensus of a “Blue sweep”, however, we think this likely makes for a “goldilocks” scenario for emerging market debt in the longer run. 
A hung congress should dampen hopes for massive fiscal spending and reflation expectations, but also prevents an excessive sell-off in US treasuries. It also likely tilts the US policy mix towards more monetary versus less fiscal stimulus, which seems less efficient to address the Covid induced growth issues, but more likely to generate the excess liquidity conditions which will boost the search for yield and global demand for emerging market assets.
For emerging markets per se, a Biden administration is widely expected to remain confrontational with China, albeit in a more strategic and predictable way, potentially enrolling EU allies in a common approach. Although remaining focused on US priorities, the new administration will return to a more multilateral, “play by the rules” approach, rejoining the Paris Agreement on climate change, the World Health Organization, and empowering its diplomats again. It will remain alert to provocations from Russia and Turkey.
Given the historic clout the US has on the International Monetary Fund, the US government’s stance on debt forgiveness and private sector involvement in future emerging market debt restructurings will need to be watched, to see if G20 statements of intent are followed by actions.
Beyond this, we fully expect the progressive emerging markets growth recovery to endure, given the political economy bias to keep economies open. This contrasts with stalling developed markets expectations in relation with the current virus surge in both Europe and the US.
By comparison, the pandemic remains contained in most of Asia, while Poland, the Czech Republic, Hungary, Russia and India are still facing renewed surges in cases. In Latin America infections remain elevated but have not worsened dramatically lately. This opens a window for emerging market currencies to outperform versus the US dollar, despite a less solid case for US dollar weakness after US elections. Emerging market governments will however be watchful of excessive appreciation, as China manifested in October.
With regards to timing, the immediate post-election environment will remain conflicted between the US virus surge, to be managed by a lame-duck administration, and a likely downgrade in developed market macro expectations, versus the likelihood of more positive vaccine news peaking EU infections by early.
A more entrenched December rally carrying over into Q1 2021, driven by better risk and yield appetite, as well as positive inflows into emerging market debt, is a fair possibility despite the certainty of weaker developed market macro data through the period.
Damien Buchet is chief investment officer and portfolio manager of Finisterre Capital. The views expressed above are his own and should not be taken as investment advice.