The Trump card for emerging markets

2017-03-29 06:00

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Had you suggested five years ago that Donald Trump would win a presidential election people would have probably questioned your attachment to reality. But the rise of Trump and more specifically his brand of politics – while endlessly controversial - isn’t a uniquely American phenomenon. A rise in populism has been witnessed across several developed countries, with anti-EU politicians gaining ground in the UK, France and Italy. 

We might all have our views on the social consequences of nationalist politics, but investors large and small have had to contend with unusual politics in several important markets. In the United States Mr Trump has openly spoken of his protectionist instincts and has clearly expressed his desire to keep as many jobs within the borders as he can.

Concurrently, the full consequences of Brexit have yet to be fully understood. Given that the British public’s motivation to leave the EU was apparently diverse and complex, Brexit might yet not be a drive for protectionism, but this lack of clarity has markets jittery.

Given such potentially combative and confrontational politics, investors might possibly seek the perceived security of developed markets. Certainly Warren Buffet, CEO of Berkshire Hathaway, has a pretty clear message too; “don’t bet against America”. Far from being flag-waving jingoism, his comments appear to suggest that in his view the power of pugnacious politics is limited. “You can’t stop this country,” he said in a separate interview.

Certainly it’s hard to work out what Trump’s talk will translate into on the ground. If he gets stuck into a big infrastructure spend then that too will potentially attract investors into US companies, and persistent talk of tariffs, trade wars and other short-term policy implications could also spook the emerging market investor.

But it’s likely that the world has changed and short-term policy changes in the United States are not going to reverse the fundamentals coming out of especially Asian emerging markets. Those fundamentals are persistent strong growth and return on investment over time. Aside from something catastrophic, there’s little Trump can say or do to change these realities.  The fact is that in emerging markets good companies remain good companies in times of fraught politics, and they can offer great value at times of heightened pessimism and fear.

As reported by Reuters last month the MSCI Emerging Markets Index is up almost 8% year on year and much of that growth is driven by interest in South American economies, including Mexico’s, which has suffered the brunt of Trump’s anti-immigration, protectionist rhetoric.

Indeed, on a recent trip to Mexico, joint head of the Emerging Markets Boutique at Old Mutual Investment Group Siboniso Nxumalo described Mexico as very exciting, saying there are huge opportunities in that market despite the troublesome state of relations with its enormous northern neighbour.

Some of this enthusiasm is likely related to the increasing relevance of inter-EM trade, which would potentially increase if the Trump administration goes ahead with its protectionist plans.

More likely, however, is that much like “fixing” healthcare, the Trump administration will find its relationships with overseas emerging markets more complex than it perhaps understood before winning the White House. The reality is, especially with China but also with other emerging markets, the US will need to tread far more carefully than it has been speaking. We’re stuck with each other, and we all need to make it work. 

Watch more: Emerging markets - where do the big opportunities really lie?


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