Emerging Markets of 2017
There’s no doubt that one of the biggest factors for emerging markets this year is what’s happening in the USA. More succinctly it’s the effect of the new Trump presidency, a potential increase in protectionism and the impact of the strength of the dollar, factors that could inhibit growth for many markets over the next 12 months.
One of the big effects of Trump’s election win was the movement of EM bonds when the result came in. This put a lot of pressure on those countries which borrow in US dollars.
There are, of course, other factors in play. There’s the continuing situation in the Middle East and the prospect of at least two important European elections, in France and Germany, this year that could further impact on the political landscape. Some emerging markets are in a good position to take advantage, others not so and how to take advantage of the various trends is going to be key for investors. It’s not going to be easy though. You are likely to find a host of differing opinions across EM experts.
It was hoped by many investors that 2016 would see a big turnaround in emerging markets. Despite a couple of bright points, the market found itself in retreat and by November the mood was a lot less favourable than it had been at the beginning of the year.
In Mexico, while everything seemed to be ticking on prior to the Trump election, post inauguration has been a little less comfortable. There are plenty of security and economic problems, not to mention the possibility of relations with the USA deteriorating which could see trade tariffs introduced.
Trump has made overtures to Russia but what will become of these still remains to be seen. Most presidents have made the attempt to reset the Russian-USA relationship. All have ended in failure. One of the key problems are the sanctions that have been introduced and whether these are likely to be loosened or even removed over the next few months.
For the moment, Russia seems to have escaped trends that affected countries like Mexico and Turkey where currencies fell considerably. It remains an enigma though and the relationship between Trump and Putin could be a significant factor.
The potential effects of a protectionist outlook from the USA could have a significant impact on economic growth around the globe. While having a buffer that could well protect them from change, areas like China are still going through an economic slowdown and the possibility of the Yuan devaluating could lead to greater demand for Asian assets if they decide to tighten capital account controls.
China is probably going to be the big issue, especially if President Trump decides to name the country as a currency manipulator. Tension between the two countries will undoubtedly have a large impact on the markets and create the potential for a trade war. Add in the potential for North Korea to cause an international incident and we could all be treading on dangerous economic and political ground.
Sign of the confusion in the area of EM comes from the fact that not all analysts agree. For instance, Goldman Sachs believe that “Brazil, Russia, India and South Africa are less at risk.”
Others say that countries which could be at most risk if the EM suffers this year are Turkey, South Africa and Brazil, all of which depend a good deal on foreign investment. Other problems could come from Venezuela, Greece and Argentina. Knock on effects if EM currencies continue to suffer could come from other parts of Asia including Indonesia.
For many, Trump is seen as the big game changer and judging by the tumultuous start to his presidency investors could be forgiven for being less than hopeful. Protectionism isn’t the only problem here. With a trillion dollar stimulus plan via cutting tax and infrastructure spending, the risk of reflation is high. In fact, just after the election results emerging equity allocations suffered a large drop, the biggest for over five years.
Of course, investment in infrastructure could well build commodity demand which wouldn’t be so bad for the market but we have to take into account Trump’s desire to buy American and hire American into the mix. EM debt is going to be another issue which will be effected by US yields and make it troublesome for some countries to raise valuable new finances.
While the conditions are uncertain, things are better, according to some, in the emerging market than they were 12 months ago. The political landscape may be a problem but so is the low oil price at the moment. On the brighter side, commodity prices seem to be behaving well and some structural reforms starting to be implemented in countries across the globe could have an impact.
Those looking on the optimistic side of things believe there will be plenty of opportunities over the next 12 months. The pessimists expect a more volatile market place that could spring plenty of surprises – after all we’re only into February and there’s a long way to go.