Aberdeen weighs Trump emerging market effect

Joanne Irvine

Emerging markets specialist Aberdeen Asset Management believes that any imposition of trade barriers after Donald Trump becomes president of the United States “may force some of the bigger emerging markets to accelerate efforts to shift from export-led growth to consumption-based models.”

Joanne Irvine, Aberdeen’s head of emerging market equities, ex-Asia, wrote: “China, for example, would finally have the catalyst it needs to fully embrace the painful structural overhaul it has been delaying.

“Despite everything that is going on, emerging markets are still regions of unprecedented wealth creation where the scope of economic activity still isn’t fully reflected in stock market capitalization.

“Growing middle classes are driving demand for everything from milk powder to cars.

“These regions will grow faster than the developed world for years to come.

“Unlike the financial markets or even changes in political climate, this is structural, not cyclical.”

Aberdeen manages assets of more than $400 billion.

Irvine said Trump’s pledge to restrict immigration and rethink the North American Free Trade Agreement (NAFTA) will be a blow to neighbor Mexico, whose currency has hit new lows.

In contrast, Irvine said Brazil is less exposed to the US and more vulnerable to fluctuations in Chinese demand.

She said Trump’s intention to increase infrastructure spending could even boost Brazil’s iron ore exports.

“Prospects for the Trans-Pacific Partnership, an Asian free trade agreement, are grim,” said Irvine.

“To be fair, Trump isn’t solely to blame. Hillary Clinton also withdrew her support, despite promoting it in office.

“While a setback, it’s hard to mourn something that exists only on paper and excluded China, the region’s heavyweight.

“Beijing has cheekily floated a substitute deal, albeit one that would follow its rules.”

Irvine said Trump will likely continue his criticism of China.

“It has become something of a US election ritual for candidates to bash China, although once in power, most swapped ideology for pragmatism.

“In Trump’s case, he has pledged to declare the country a ‘currency manipulator’ as one of his first official acts. This initial step that could lead to the imposition of trade tariffs.”

Irvine said it is still early to jump to conclusions, but investors have dumped emerging-market stocks, bonds and currencies.

“Not only are there concerns over protectionism, but Trump’s tax cuts and fiscal stimulus will also boost borrowing and force interest rates upward,” she said.

“That is positive for the dollar but negative for emerging markets, which may suffer capital flight after having clawed back flows in recent months as investors saw improving fundamentals.

“A longer-term question is whether Trump’s policies, if enacted, won’t be self-defeating.

“Protectionism is likely to add to inflation in the US by making goods more expensive. Under this scenario, US companies would become less competitive, and eventually US growth would slow.”

Irvine said Trump’s victory adds to existing uncertainty in the world and Aberdeen expects his success to embolden like-minded politicians elsewhere to agitate for similar policies.

She added: “Europe is the next battleground. While emerging countries do not face the same political concerns, rising nationalism could threaten the security as well as the trade on which post-war prosperity has been built.

“That said, there is cause for hope. Developing economies, on the whole, are in a better position to weather uncertainty than even a few years ago.

“Economic and monetary policies are very orthodox and this has been paying off. Inflation is largely under control or falling.

“Currency weakness may slow but should not prevent central banks from cutting interest rates to support growth. At the corporate level, there are signs the earnings cycle is turning for the better.”