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Election impact on EMs: top managers reveal battle plans

Election impact on EMs: top managers reveal battle plans

During his campaign, Republican presidential candidate Donald Trump threatened to pull out of trade agreements and limit immigration from Mexico.

While his relations with Russia may appear more friendly, his policies have caused some consternation across the developing world as a whole.

Now that he has been elected President of the United States, what can investors in emerging markets expect?

Citywire Selector asked leading managers for their views on how Trump’s presidency would affect the market.  

An ideal environment

Jason Pidcock, who manages the Jupiter Asia Pacific Income fund, said that as the Federal Reserve may postpone the expected interest rise emerging markets could benefit.

In foreshadowing this Trump win, investors have been selling out of equities and keeping their powder dry. If this continues, and the fear of a recession under a Trump presidency spreads, we believe it is likely that the US Federal Reserve may well postpone its much-anticipated December rate increase.

Paradoxically, such a scenario might create an ideal environment in which the Jupiter Asian Income could flourish; bond prices would be pushed up, yields would fall and investors seeking income would be practically forced to continue to search for yield in equities. Then again, what good is outperformance when you’re only able to do so on a relative basis against a turbulent market.

Asian stocks that derive a significant portion of their revenues from the US market may see short-to-medium term volatility, driven by market sentiment. Within our fund, these are mainly IT and electronics companies like Hon Hai, Delta and TSMC, that are based in Taiwan and play a big role in the Apple/iPhone supply chain.

At a country level, we believe the Philippines will continue to be a risk: whether President Duterte likes it or not, the country does have economic ties to the United States. It has one of the largest call centre operations in the world, and American companies are a huge employer in this field.

If there is one small consolation for us, it is that Trump’s election means Duterte is arguably no longer the most controversial head of state in the world. Trump, we believe, is likely to spark any number of diplomatic rows as his presidency gets underway, but for the Philippines, we think a lot of the bad news has already been priced in. We remain overweight, but aren’t adding any more positions until we see how things pan out.

Russia will benefit

Frontier markets specialist Michael Levy of Barings said, while China and Mexico will suffer, Russia may see current trade sanctions abolished.

Uncertainty is the big takeaway from Donald Trump’s shock US election win. That being said, the Republican president-elect’s victory is very much in keeping with the growth in populist politics and protectionist rhetoric across the western world. Investors will right now be in the process of attempting to differentiate between Trump’s actual policy positions and some of the more outlandish statements made on the campaign trail.

There are also foreign policy implications for agreements such as the recent Obama-sponsored deal with Iran, which could now come under increased scrutiny. In addition, NATO’s current status could be called into question and contributions by member states may need to be amended. This could have a negative impact on Eastern European countries.

Across the Mexican border, there is likely to be a great deal of apprehension as to what the coming months may bring. If we are moving toward tariffs, global trade will likely suffer and capital flows between countries may weaken—Mexico’s reliance on the US could see it disproportionally affected.

Almost a third of Mexico’s GDP relies on its northern neighbour and Trump’s promise of a 35% tariff targeted at US companies that outsource abroad could be costly, particularly for the automotive industry. Trump has also mentioned plans to renegotiate the North American Free Trade Agreement (NAFTA), another potentially worrying development.

Perhaps the greatest beneficiary of a Trump presidency, Russian relations with the U.S. will now undoubtedly improve. We will possibly see a reduction in sanctions in the coming months, allowing Russian businesses to more easily finance themselves. This should provide a boost to Russian companies’ prospects and may present new opportunities among Russian equities.

Largely overblown

CIO and manager of several funds at Matthews Asia, Robert Horrocks, said it is doubtful that many of Trump’s policies could be enacted.

I think some of the rhetoric on trade has been stuck by both candidates, but their ability to work around or renegotiate trade contracts, or trade agreements is very limited.

One area where there is a fair amount of agreement on policy is in fiscal spending, infrastructure spending, the potential that whoever wins tomorrow that you might see a push for increased spending that might prompt the Fed to raise rates faster than they otherwise would I think that would have a short term negative impact on sentiment and short term portfolio flows in and out of markets including Asia.

But its actual long term impact on fundamental growth of Asia is very small, and although the impact in the markets can be abrupt, Asia is in a far better position than other parts of the emerging markets to offset any external demand shocks.

This is through either fiscal or monetary policy due to low structural rates of inflation and high current account surpluses and government budgets that are in pretty good shape so in that sense much better off than in Latin America and Eastern Europe in particular to offset any shocks that come from the US election.

Volitility creates opportunity

Claudia Calich, who manages the M&G Emerging Markets Bond fund, said Trump's victory is already being priced in, but volatility could create opportunitiy. 

These risks are already being reflected in asset prices. Since the result, Mexico is one of the largest underperformers due to its deep trade and economic ties to the US. Another region which could suffer is Central America.

If Trump goes ahead with all of his proposals during the campaign and manages to overcome the logistical nightmare of having all illegal immigrants deported, remittances from these immigrants will come to an end and that will certainly have an impact on their home countries’ economies.

As is always the case, volatility creates opportunities. There are several countries that are relatively closed economically, such as India and Brazil, that have relatively low trade or immigration ties with the US.

Countries within Eastern Europe are much more dependent on Europe than the US for their exports or financial channels. In this respect, they will be much more impacted by the upcoming Italian, French and German political events than the US election.

Russia may benefit from today’s result should the US start easing financial sanctions. Finally, commodity credits such as Sub-Saharan African issuers are much more dependent on China as a driver for commodity demand or for financing than the US. In terms of relations with China, imposition of trade tariffs and whether the US Treasury will name China as a currency manipulator will be the key events to watch.

We will look to selectively increase exposure to countries that have relatively looser ties with the US and whose asset prices have been unduly punished or for assets that have severely underperformed, such as the Mexican Peso, which is finally pricing in a lot of negative news after a 50% depreciation in the last two years.

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