Trump’s victory could dampen emerging markets’ resurgence

For the five years to December 31 2015 the MSCI Emerging Markets index fell 17 per cent in sterling terms, compared with the gain of 53.2 per cent for the MSCI World index, data from FE Analytics shows. 

In particular, the MSCI Brazil and MSCI Russia indices struggled, plunging 64.9 per cent and 45.2 per cent respectively in the period. Even the MSCI China index only climbed 9.7 per cent, though the MSCI Philippines has been the standout emerging market index of recent years, rising 75.6 per cent. 

Much depends on trade policy, as many emerging market countries are heavily export dependent to the US Jim Cielinski, Columbia Threadneedle Investments

The start of 2016 appeared to show no change in sentiment, with oil prices falling to lows of less than $30 a barrel and concerns over China’s growth. But as commodity prices rallied and Chinese fears abated, emerging market fortunes started to improve. For the year to date to November 10 the MSCI Emerging Markets index has risen 32.9 per cent, compared with the MSCI World index’s gain of 23.1 per cent. In addition, the stragglers of recent years – Brazil and Russia – have jumped ahead, with the MSCI Brazil index climbing 93.2 per cent and the MSCI Russia rising 55.8 per cent. 

But the recent election of Donald Trump as US president could subdue the resurgence of these markets. Tim Love, investment director at Gam, suggests the critical question from Mr Trump’s pro-US trade stance is whether it could slip into “full-blooded protectionism”. 

Mr Love says: “A world of heightened trade and regulatory concerns is not good for emerging market free trade.

“If the US withdraws from World Trade Organization initiatives and free trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP), losers will include Taiwan and [South] Korea. China would also be another free-trade loser – and if the market there is holding up it is partly due to the local perception that in geopolitical terms, and compared with [Hillary] Clinton, [Mr] Trump may be the lesser evil for China.”

Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management, adds: “The combination of looser fiscal policy and increased uncertainty over globalisation is likely to mean a stronger dollar and potentially higher US inflation and interest rates. That is not a helpful combination for the rest of the global economy, especially emerging markets. But that, too, is uncertain and could take time to materialise.”

Meanwhile, Jim Cielinski, global head of fixed income at Columbia Threadneedle Investments, suggests the election result could be “most worrisome” for emerging market debt. 

“Aside from the risk to the close trading partners of Latin America, and Mexico in particular, China is also a concern. Much depends on trade policy, as many emerging market countries are heavily export dependent to the US. Do not expect clarity for several more months,” Mr Cielinski says. 

As we near the end of 2016 it is unclear whether the recent boost in emerging market performance has been a short-term surge, or is part of a longer-term trend that Mr Trump will be unable to squash. 

Nyree Stewart is features editor at Investment Adviser