Emerging Markets in 2017: effects of new Washington administration

There’s quite possibly never been such a divide amongst people on their opinions of one man – Donald Trump. It’s hard to be neutral. It’s hard to believe that media is unbiased and it’s hard to imagine Trump as an inspirational humanitarian.

However, already on the back of his election, the markets have taken a positive swing, believing that lower company tax and greater business stimulation will be good for America. And make no mistake – what’s good for the US economy is generally good for everyone.

Emerging markets

Despite this initial reaction, there are concerns around the fact that an aggressive protectionist strategy may shut out or largely reduce trade with emerging markets. Currently predictions are difficult because the full outline of Trump’s new policies have not as yet been clarified.

So early in 2017 what we have is speculation – but also some interesting factors showing that emerging markets have been showing greater optimism than ever before:

  • Up to the beginning of 2017, those emerging markets showing relative political stability and positive company earnings, have also delivered significantly stronger growth. The adoption of aggressively-driven protectionist policies on the part of the US would pose real risk to this improved status.
  • While improvements in the underlying growth of emerging markets are still evident, many stocks and currencies saw an immediate sell-off after the election of Donald Trump. Investors believed that Trump’s policies to end trade deals and impose tariffs on China would negatively affect emerging markets.
  • But the balance hangs on his pro-investment agenda for the US which has raised expectations of higher interest rates and a stronger dollar, which in turns offsets the impact of losses for the emerging markets.
  • Donald Trump’s electoral triumph has stoked expectations for fiscal stimulus that will propel US economic growth and hopefully spread this to the rest of the world. For emerging markets, though, his presidency may signal an end to the good years. For some, economic reality may soon hit home. For others, the future may actually look a bit brighter.

Weathering the storm

While all markets will be touched by the volatile changes in American policies, not all emerging markets are equally vulnerable. Those that can weather a protectionist storm together with higher interest rates, are those with current-account surpluses, including: Poland, the Philippines, South Korea, Malaysia, Taiwan and China. In addition, Argentina, Brazil, Serbia and Indonesia should be attractive bond markets for government debt, according to Morgan Stanley.

Brazil: Prospects for high yields, low growth and falling inflation should make rates attractive for investors. Brazil presents good opportunity for both bonds and equities – but its large fiscal deficit is a negative factor.

Russia: Remains attractive for equities – and expectations that oil prices will stabilise through 2017, together with decreased inflation and perhaps a more friendly rhetoric from the US, should act as a boost to Russia’s economic growth.

China: Chinese equities should be an attractive opportunity, mainly in technology and insurance stocks. There should be a recovery in earnings, valuations are attractive and liquidity should be buoyant.

Indonesia: Worth keeping an eye on. The reform agenda in Indonesia makes the country one of the strongest-performing emerging markets. (Credit Suisse)

Those in jeopardy

  • Countries that are already economically vulnerable would suffer the most from a protectionist Trump presidency. Broadly-speaking, that means countries with large current-account or fiscal deficits, or those emerging economies with significant trade links with the US, such as: Mexico and Vietnam.
  • Depending to what extent restrictive trade policies are implemented, the direct impact would be felt via a decline in exports from emerging markets to the US. Under this kind of agenda, emerging markets’ currencies would depreciate steadily over the next two years.
  • But the real Achilles heel will be the extent to which emerging markets have current-account deficits and are importing capital to fill gaps, and are being forced to take stringent measures as foreign investment flees. Faring the worst, would possibly include: Mexico, Argentina, South Africa, Egypt, Turkey and India.
  • Deficit countries have had currencies falling against the dollar for the past five or six years. Added to this, their inefficient economies, slow growth and often entrenched corruption, makes them suffer much higher inflation levels than the surplus economies – and this does not bode well in a new era of protectionist policies in America.
  • Some markets therefore, are a safer bet than others – but all markets need careful assessment. Those that can weather the storm would probably show worthwhile returns sooner than expected. Countries already proposing or implementing reforms, with the management skills to see them through, may actually see strong growth, even under the new US agenda.
  • Also good to remember that higher growth in America is good for the world, including emerging markets. If you fall on the side of the divide that sees you believing Trump means more inflation, lower taxes and greater economic growth for the US – and you believe oil prices will stay above $50 thanks to OPEC, which will lead to a commodity rebound – then emerging markets look better than they have in years.

No game change with us

At Foster Wealth, through all of the uncertainty, we believe in remaining committed to our investment philosophy and remaining focused on what matters.

Find out more about us at: www.fosterwealth.co.za