Emerging markets soar as investors turn off ‘America First’ President Trumps Policies

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Predictions about the future of financial markets went badly astray last November when Donald Trump was unexpectedly elected president.

The “Trump bump” hasn’t just been a bonanza for US investors. Most predictions back before November 8 were for shares to plummet with the defeat of Hillary Clinton and that emerging markets exporting to the US would be hit hardest. In South America Argentina, Chile and Uruguay were pointed out by so called experts as the ones that would be most affected.

This was due to Mr Trump’s announcements about trade issues, tariffs on goods, currency manipulators and “America first” policies in general.

However the opposite has happened: developing-world assets have been among the biggest winners so far this year.

As with Wall Street, emerging-market currencies, bonds and shares fell sharply immediately after the election, as investors anticipated rising US interest rates, a stronger dollar and more trade barriers.

And just as investors were quick to change their minds about the pro-business domestic effects of Trump policies – more infrastructure spending, reduced regulation and lower taxes – they have also swung around on the benefits for developing countries of strong global growth, near record low valuations and rising commodity prices.

Stocks gain since New Year

The evidence is in the MSCI Emerging Markets Index of stocks, which has gained around 7% this year. This is more than double the gains of the S&P 500 on Wall Street.

The MSCI China stock index is up around 4% since the election. Singapore is up 6.6%, Hong Kong’s Hang Seng up 6.0% and India’s Sensex up 6.4% since January 1. The Dow Jones Global index (ex-US) up 3.1% and Argentina’s Merval has surged a spectacular 13.5%.

In currencies, Brazil’s Réal is now stronger than it was before the vote and even the Mexican Peso, which has been particularly sensitive to Trump’s rhetoric, has rallied in recent weeks.

Much of this rethink is due to interpreting Trump’s policy directions. Phrases like “taking Trump seriously but not literally” is a classic example.

Investors had already priced in the worst for emerging markets and now they are taking chances that he will under deliver on border taxes and trade imposts.

Of course, the risks remain but commodity prices, including whole milk powder, are going up, while oil remains near $US50 a barrel.

Money on the move

The money movers on Wall Street have taken the opportunity to again put their money into riskier assets.

According to data provider EPFR Global, money managers have poured $US1.4 billion into emerging-market equities in the first week of February, the most in 16 weeks.

This followed a withdrawal of more than $US5 billion in the first few weeks after the US election.

Meanwhile, the Trump bump has shown signs of waning. The US dollar, for instance, is now down more than 1% since the beginning of the year.

If Trump policies to create jobs in US manufacturing are to get anywhere, they need a lower dollar. It doesn’t help that interest rates are heading up.

Both of these are typically bad news for emerging markets, whose debt and commodity exports are often denominated in US dollars.

But the worst of these fears are abating. It helps that long-term views of the US economy is for a reality hit as the Trump spike fades. This gives investors the opportunity of having another look at emerging markets.

Hard commodities rise

Commodity metals are up. In November, Australia posted its first monthly trade surplus since early 2014 due to a surge in coal and iron-ore prices. Gold and copper, also important in emerging markets, have also been rising. Gold is up nearly 8% this year, while copper is up more than 6%.

An important gauge of the difference between future and spot prices of oil is now indicating short-term prices are moving higher. This means it now longer makes sense to store oil, thus it looks as if the supply glut is coming to an end.

Food commodities such as sugar are also up.

The International Monetary Fund expects Russia’s economy to expand by 1.1% this year after two years of recession. The IMF expects emerging economies as a whole to expand by 4.5% this year, up from 4.1% last year and more than double the rate in advanced economies.

In Asia, companies are signalling that earnings have stabilised and set to rise in countries such as South Korea. Emerging-market stocks have underperformed against their developed-world peers for more than two years.

Economic picture improves

JP Morgan economist David Hensley says global economic trackers are running at a fairly fast pace, with last week’s January PMI (purchasing managers indicator) rising to a level consistent with 3.2% annualised GDP growth while its “nowcaster” is pointing to even faster 3.4% growth.

“For now, our economists remain cautious about raising estimates and our standing, bottom-up forecast is for 2.8% gains in global GDP both this quarter and next,” he says.

“The growth of the global economy has been very stable during this expansion, generally ranging between 2.25% and 3.25%.”

Among other positive pointers, Mr Hensley notes Indonesia’s GDP expanded 5.4% quarter on quarter in the final quarter of last year while inflation in Brazil is dropping dramatically.

Reprinted from the NBR

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Post available in: English