EM managers hunting for bright spots after Trump win

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EM managers hunting for bright spots after Trump win

Maligned in recent years, emerging markets have enjoyed an uptick in popularity in recent months – most obvious in October when the IA’s Global Emerging Markets sector recorded £223m of net inflows.

However, the November election of Mr Trump – who has stated he wishes to withdraw from the Trans-Pacific Partnership trade deal, renegotiate the terms of the US’s North American Free Trade Agreement (Nafta) partners and eliminate what the Republicans dubbed Mexico’s “one-sided back-door tariff” – has prompted a re-evaluation of prospects amid fears global trade could suffer.

A renewed rise for the dollar has also put pressure on developing markets. But managers believe several economies could flourish in spite of these headwinds.

Kumar Pandit, an analyst for emerging markets specialist Somerset Capital, said that Chile – a major producer of copper – could perform well, while former pariah Argentina could prosper because of factors including a process of economic reform and its president’s strong relations with the incoming US president.

Others also backed Brazil and India, countries riding out their reforms with a focus on domestic growth rather than being reliant on international trade.

“Brazil may fare well because it has undertaken its own form of protectionism,” explained Mr Pandit. “They have huge tariffs, particularly on Chinese imports. That has driven companies to invest in the country – though a lot of that has slowed down in the past 18 to 36 months.”

Gonzalo Pangaro, who runs T Rowe Price’s $1.6bn (£1.3bn) Emerging Markets Equity portfolio, said Brazil was his largest relative overweight, and noted that president Michel Temer was committed to pursuing economic reforms. 

He added that while recent volatility could delay monetary tightening, interest rates were already high with inflation beginning to decline.

Both Mr Pangaro and Mr Pandit also favour India, with the latter noting valuations looked “attractive” in the country, where reforms are already underway.

However, it is the short-term impact of a potential shift towards protectionism that is occupying most emerging markets managers’ thoughts, with those holding a big China exposure at risk.

While one notable victim has been Mexico, whose currency appeared to bear an inverse correlation to Mr Trump’s fortunes in the presidential race this year, others warned China also looked vulnerable.

John Greenwood, chief economist at Invesco Perpetual, argued that a rise in protectionism could affect the world’s second largest economy. “Mr Trump [may] impose tariffs on raw materials imported from China but I don’t expect him to impose those kind of tariffs on finished goods because, apart from anything else, the people who voted for him do their shopping at malls and a lot of what they buy comes directly from China,” he said.

Simon Down, a portfolio manager at Nikko Asset Management, added that China looked “most exposed” amid Mr Trump’s proposals to label it a currency manipulator and target “unfair subsidy behaviour”, noting that China exports $500bn of goods to the US each year while the annualised trade deficit between the two exceeded $300bn.

 

Carmignac boss keeps faith in Mexico’s economic performance

Carmignac managing director Didier Saint-Georges has said the country could be the best-performing emerging market of 2017, despite much of Donald Trump’s campaign rhetoric focusing on restricting immigration and trade from Mexico.

The Mexican Peso lost 10 per cent against the US dollar in the initial aftermath of the election, but Mr Saint-Georges has backed Mexico’s economic positioning.

He said: “Mexico has strong macroeconomic fundamentals and a sound financial system with liquidity and foreign exchange reserves.

“The depreciation of the peso over the past two years – losing 23 per cent since December 31 2014 – has boosted foreign direct investment.”

He added that he believed Mr Trump was unlikely to fully implement his campaign promises, while the Mexican central bank had the means to support the country’s market in the event of a sell-off.

“Sovereign debt offers positive real rates of 2.15 per cent and we expect the country to deliver a primary fiscal surplus next year,” he said.