Emerging Asian markets like the Philippines are facing trade headwinds that would put pressure on their currencies to weaken against the US dollar, according to Deutsche Bank Research.
"We think 2025 will bring with it a more negative tilt on the distribution of expected returns for emerging markets, mostly driven by spillover from a regime shift in policy in the US, but likely also fatter tails predicated on the sequencing and speed of that shift," Deutsche Bank global economics and thematic research head Jim Reid and group chief economist and global research head David Folkerts-Landau said in a Nov. 25 report.
As an asset class, emerging markets in Asia and elsewhere are "negatively exposed to threats of disruption/shifts in global trade from increased use of tariffs" under the US President-elect Donald J. Trump's plan when he returns to the White House this coming January, Deutsche Bank said.
Central banks in emerging markets are likewise vulnerable to "potential disruptions/delays to easing cycles (as US monetary conditions tighten) and [their] spillover into local institutional dynamics (relationship between governments and central banks, for example)," the global investment bank added.
Also, emerging markets as a whole would be right smack in the middle of "potential reconfiguration in geo-strategic relationship between the US and rest of the world," it noted.
On the flip side, if Trump pushes through with his deregulation and expansionary fiscal agenda, "spillovers from positive adjustments to both demand and supply functions in the US should benefit emerging-market economies; as might also the prospect of reduced risk premium on key geopolitical issues which impact emerging markets directly and indirectly," Deutsche Bank Research said, referring to the ongoing wars between Russia and Ukraine as well as in the Middle East, which jack up global commodity prices.
For Deutsche Bank Research, Trump's upcoming policy trade-offs would "likely be most acute for Asia, which stands in the eye of the storm with some of the biggest trade surpluses with the US."
The Philippines enjoys a trade surplus, or more exports than imports, with the US—America is its No. 1 export destination, even as China is the top source of imported goods.
"The response from individual central banks—likely to be more sensitive to bilateral USD foreign exchange (FX) for managing expectations and inflation pass through... will drive both relative FX and rates performance," Deutsche Bank Research noted.
"China's policy response will be a key anchor for the region, both on whether/where it draws a 'line in the sand' on FX, and if it shifts from a reactive/ passive approach towards fiscal support (aiming to underwrite the growth downside) to a more proactive mode (shifting the balance to the upside)," it added.
The Bangko Sentral ng Pilipinas (BSP) started its easing cycle back in August, but Governor Eli M. Remolona Jr. just last week cautioned that the anticipated rate cuts moving forward may be delayed by "some inflationary pressure" plus "somewhat weak" economic growth lately.
"We see North Asia FX (Chinese renminbi and South Korean won) underperforming South Asia (Singapore dollar, Philippine peso and Indonesia rupiah), and as a corollary a higher probability of rate cut expectations being pared back in north (South Korea) versus south (Thailand)," Deutsche Bank Research said.