US presidential candidates' economic policies could have a significant negative impacts on investors in emerging markets, according to Citywire + rated Matt Linsey.
In an investor update, the founder of boutique North of South Capital, who also runs the GAM Star North of South EM Equity fund on mandate, said markets have failed to look beyond the Republican hopeful Donald Trump’s views on immigration at present.
Trump - who along with all other candidates had his economics policies assessed by Citywire Americas - has a decidedly protectionist view, which involves a seemingly hostile relationship with China.
‘What has received less publicity internationally is his view towards globalisation and particularly China. He is demanding that China dramatically increase the value of the renminbi, by some accounts by at least 30%. If not, he is threatening to implement punitive tariffs on Chinese imports,’ he said.
‘Given the almost $1 trillion dollar reserve depletion seen over the past year as the authorities have tried to prevent a significant depreciation, it is hard to see a scenario whereby they could engineer as significant appreciation.'
'Although he has not threatened, from what we know, to rip up the NAFTA agreement with Mexico and Canada, it would be only a matter of time before he would seek to renegotiate this treaty.’
Linsey said the Democrat hopefuls' policies are also isolationist, which could hurt international trade links. However, he added that once politicians take office, they have historically toned down their views.
‘The surging Democratic candidate Bernie Sanders, although coming from the left, has similar, if not even more hostile, views towards globalisation. This has forced the current front runner for the nomination, Hillary Clinton, to adopt a much more populist approach, particularly as it relates to free trade.’
‘From an investment standpoint we would avoid those companies that have benefited from offshoring, particularly from the US market. If the situation deteriorates into an open trade war with competing tariffs and restrictions, then all markets will suffer the consequences,’ he said.
Banking on nationalism
Linsey thinks there has been a swing towards economic nationalism and he cites the behaviour of central banks in Japan and the US as an example.
‘The Bank of Japan along with the strong support of the Government has attempted to lower the value of the yen through aggressive easing in order to reflate their economy. This has been done without regard to any negative impact this policy could have on the rest of Asia, particularly South Korea and China.’
‘We have little doubt that if the economy does not respond that the Japanese authorities will resort to full scale monetisation, which would most assuredly bring down the value of the yen,’ he said.
The GAM Star North of South EM Equity fund lost 24.4% over the three years to the end of January 2016, which compares to a fall of 24.2% by the MSCI EM (Emerging Markets) TR USD index over the same timeframe.