President Trump’s rhetoric towards Mexico and China is making the US a rule-less economy, according to Vontobel’s head of emerging market bonds.
Speaking to Citywire Selector, A-rated Luc D’Hooge, who runs the Vontobel Fund Emerging Markets Debt fund, said the Mexican peso is an ‘obvious currency’ that would be affected by Trump, but also highlighted Asian currencies as targets.
'Asian currencies could suffer from trade measures Trump may undertake, as China is probably one of the biggest worries with Trump. I expect there will be much tougher discussions with China, which could affect Asian currencies more.
'This is, of course, if you expect the dollar to be strong. Possible trade and border tax discussions will have a big effect on the dollar, as well as an inflationary effect which could push emerging-market countries to raise rates quicker.'
D’Hooge said a quick period of rates rising would be beneficial to the dollar but said, if investors look closely, Trump is ultimately creating an un-investible economy.
'He’s creating an economy where investors will be reluctant to invest, as it becomes less and less rule-based. There will be massive political stimulus on the moment when it’s already too late, at the end of an economic cycle. There’s not much slack left.
'You cannot exclude the fact that Trump is doing something really bad for the American economy, which could then dip into recession in a year or two, this would not be good for the currency in the long run.'
D’Hooge currently has 2.4% of the portfolio exposed to Mexican bonds and said downward pressure on the peso, which is down by 14%, makes Mexico a more competitive manufacturing country.
'We have seen quite a correction on Mexican currency, we were previously very underweight in our local currency fund.
'When the FBI announced they were going to re-investigate Hilary Clinton’s emails the peso had already had a nice rally, so it was a good moment to sell. We did not sell external debt there due to the currency being down 14%.'
D’Hooge said, to some extent, the US is dependent on Mexico for trade, and highlighted car manufacturing as one space the US could lose out by cutting ties with Mexico.
'About one-third of the cars produced in Mexico are produced by the big American makers, I do expect some opposition from these companies, as they seem to be very concerned about the impact of a negative trade deal.
'Mexico is doing a lot to reduce immigration towards the US, and not just regarding Mexicans, they are also limiting immigration from other central American countries. So hurting Mexico might not be good for the US, they might lose an ally in fighting immigration.'
'The US might be in a better position to renegotiate the North American Free Trade Agreement but they don’t need to be doing detrimental things to themselves. Much of the possible bad news is priced in and therefore Mexico trades very cheaply.'
The Vontobel Fund Emerging Markets Debt fund returned 21.97% in US dollar terms, over the three years to the end of January 2017. This compares with a 22.29% rise by its Citywire-assigned benchmark, the JP Morgan EMBI Global Diversified TR, over the same time period.