Trump’s election could have positive outcomes in emerging markets, says Brian Weber.
It’s very difficult to give any firm answers at this stage as to how Donald Trump’s presidency will impact upon emerging markets. During the run-up to the election Trump made two points clear – that he would put Americans first and that he had big plans to boost infrastructure spending.
The markets have reacted to his stance on infrastructure and the positive impact this could have for the US in terms of potential growth and increased fiscal spending. With the Republicans winning the House and Senate it is more likely these decisions could get pushed through should Trump choose to pursue them.
If you look at US ten-year yields, these are selling off which means the markets are aware of the longer term inflation implications – big infrastructure projects, big infrastructure spending – which might result in commodity demand picking up and input prices going up.
This would benefit emerging markets, so there are arguments for positive consequences globally, at least in the short to medium term.
Emerging markets remain relatively undervalued compared to global peers and their currencies have weakened significantly during the previous two years
On the other side of the argument, however, are Trump’s protectionist policies and what they could mean for places like China, Korea and Mexico. The key cause for concern is that many trade agreements and tariffs do not need congressional approval, so it will be easier for Trump to act on his rhetoric should he wish to.
At this point then, much remains unknown but, whilst we acknowledge that there are a number of significant headwinds facing emerging markets, leading into the elections there were three positive trends within the sector – US dollar stability; commodities bottoming out and increasing inflation expectations; and deleveraging of the US consumer potentially coming to an end.
Emerging markets remain relatively undervalued compared to global peers and their currencies have weakened significantly during the previous two years, which improves their competitiveness in the longer term. If we see a period of stability in the US dollar (USD), many of the shorter term headwinds will dissipate.
This stability is very beneficial for emerging markets, and should increase certainty and reinforce spending and investment. Conversely, USD denominated debt becomes a big headache should the ‘greenback’ start to strengthen again.
Commodity prices look like they might have bottomed out and this has definitely had a positive impact on many emerging market industries. Specifically we’ve seen large-cap value stocks – which are very much biased towards commodity producers, primary industries and more cyclical mega-cap stocks in the emerging markets – benefiting and becoming the best performing asset classes within the emerging markets year to date.
DELEVERAGING BOTTOMING OUT
The US consumer started deleveraging at the end of the global financial crisis in 2009, but we are starting to see this bottoming out. We are seeing increased consumer borrowing and lending activity within the US, which has historically correlated with Chinese GDP growth.
We are seeing increased consumer borrowing and lending activity within the US
Since the financial crisis, Chinese GDP growth has fallen or slowed down on the back of the deleveraging cycle in the US. As the two biggest markets in the world – the biggest manufacturing market and the biggest consumption market – you’d expect some form of correlation.
The bottoming out of the US consumer could potentially be an indicator of the bottoming out of global GDP growth and as a result we might see an upturn in spending and investment globally. These are all very positive indicators for emerging markets.
The economic consequences for emerging markets under a Trump administration, however, are still very unclear. Therefore any actions taken now would be based on a high degree of speculation over what the future might look like or actions President Trump might take.
While we are bullish on US markets, I believe the impact on emerging markets is too difficult to assess at this early stage.