Investors are waiting for Trump 2.0 to start. Emerging market stocks hit their biggest discount on Inauguration Day.

Notice that on Monday, emerging markets are preparing for Donald Trump's second term, with the stock market experiencing the largest valuation discount on a US presidential inauguration day in history, and some bond spreads reaching the highest levels since the inauguration day. Based on expected price-earnings ratio calculations, the MSCI Emerging Markets Index opened 46% lower than the S&P 500 Index, marking the largest drop since Barack Obama's first day in office in 2009. Although the index has risen for the fifth consecutive day as the market expects Trump to gradually increase trade tariffs, stock prices are at a discount of 49% compared to the past 12 months' earnings, the largest discount since Bill Clinton's second term. The average yield of local currency bonds in emerging markets is lower than US Treasury yields, marking the first time a negative spread has been seen on inauguration day since 2009. Credit default swap averages 163 basis points, the lowest level on an inauguration day since Obama. Dollar-priced corporate bond yield premiums are at their lowest level since 2005. This is in stark contrast to US assets, where stocks have historically been priced higher than bonds. Despite emerging market bond traders focusing on absolute yields and accepting narrower spreads, if the Trump administration (especially its early executive orders) triggers global market risk aversion, depressed risk premiums could become a pressure point. On the other hand, if Trump's policies lead to a shift in risk appetite, the attractiveness of stocks at low prices could attract bargain hunters. Aarthi Chandrasekaran, Head of Asset Management at Shuaa Capital Psc in Dubai, said, "Despite the good profit trajectory of emerging markets, investors remain underweight in emerging market stocks, mainly due to US policy actions, a strong US dollar, and rising US interest rates. On the other hand, emerging market bonds face credit spread tension. With potential impacts from tariffs and continuing uncertainty, direction of these spreads may tilt towards widening, triggering a downtrend." Emerging market assets were under tension before Trump took office Emerging market assets showed a slight rebound on Monday, with stock indices poised to record the largest five-day gain in over three months. Major currencies also rose for the fifth consecutive day, with leading currencies including the Korean won, Czech koruna, and Thai baht. CDS spreads narrowed for the second consecutive day. The US dollar weakened, with the currency market implying an increased likelihood of a Fed rate cut in July, leading to increases in emerging market assets. Chandrasekaran said, "The real risk that investors face is not the volatility of emerging markets, but the opportunity cost of remaining invested in the US market." Although investors raised their demand for additional yields on holding emerging market sovereign dollar bonds instead of US Treasuries last week, the spreads are still relatively narrow compared to historical levels. JPMorgan's preliminary intraday data show that the premium narrowed again on Monday. Meanwhile, the record-breaking start to emerging market bond sales this year may face risks of failure. The MSCI Emerging Markets Currency Index hit a new high since January 7, continuing the momentum of the rebound from oversold technical levels. Traders believe that the likelihood of Trump immediately implementing tariff measures after taking office is low. After a ceasefire agreement between Israel and Hamas took effect, Middle East dollar bond prices rose. Egyptian bonds due in 2059 are among the best-performing bonds in Bloomberg's Emerging Markets Sovereign Total Return Index and hit a one-month high. Mozambique bonds are the worst-performing bonds in developing countries. The country's new finance minister stated that post-election unrest resulted in the government losing approximately 42 billion meticais ($6.64 billion) in revenue, prompting the country to consider restructuring public debt. In Eastern Europe, investors are betting that Romania will relax its control over its currency, as Romania faces its biggest political crisis, putting pressure on the management of the leu's floating exchange rate.