9th November 2016
Michael Levy, Frontier and Emerging Markets Investment Director at Barings, discussing the issues and opportunities for emerging and frontier markets following Donald Trump’s U.S election win.
Uncertainty is the big takeaway from Donald Trump’s shock U.S. 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.
We see a number of possible issues and opportunities for emerging and frontier markets. Mexico, China and Russia are all significant areas of investment across our portfolios—three markets where we see a Trump presidency potentially having a major impact.
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 U.S. 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 U.S. 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.
The loss of remittances is another possible outcome if Trump clamps down on immigration as he has promised. Remittances to Mexico from the U.S. amounted to $25 billion in 2015—2% of GDP. Due to the likely weakness in the currency’s value, this decrease may be mitigated in Pesos. A weak Peso could also provide something of a boost to domestically-focused companies.
Much of Trump’s ire has been directed at China and its economy’s undercutting of the American worker. This rhetoric culminated in talk of 45% tariffs against Chinese exports, a move that could potentially start a trade war. The global supply chain, which is highly interconnected in the IT and automotive industries, would also suffer greatly and is already facing disruption after the Brexit vote in the U.K. At this point we should note that trade policy can be changed by executive order—an intransigent Congress may not be able to intervene. If we do find ourselves in a trade war, Chinese authorities would likely act to stimulate demand, but the Chinese equity market, which has performed well in recent months, could become increasingly volatile.
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.
Markets like certainty and after the shock of the Brexit vote in the U.K., a Trump presidency is not what most investors would have wished for. Regardless, our bottom-up investment approach focusing on fundamentals is unchanged. Our aim remains to find attractively priced companies with the potential for strong long-term earnings growth, well-defined business franchises, robust balance sheets and proven management.