TRADE WARS
There could, however, be trouble ahead. If President Trump’s plan to place tariffs on steel and aluminium imports leads to a trade war then “global markets, including emerging markets, will be impacted,” says Uday Patnaik, head of emerging market debt at Legal & General Investment Management (LGIM).
He adds that there could be multiple ramifications if there was a trade war, including an impact on emerging market currencies (via US dollar and inflation concerns), as well as country and sector specific issues (the North American Free Trade Agreement, China), and a “likely increase in volatility.”
Invesco PowerShares head of multi-asset research Paul Jackson points out that this move by Trump could hit emerging markets hard. “A trade war could depress commodity prices, which would be a further handicap to some emerging economies and currencies.” Remember, it was the collapse in commodity prices that was major contributor to the developing world crash seven years ago.
Candriam’s head of emerging equity management, Jan Boudewijns, gives a more nuanced view. “It is impossible at this stage to predict how this trade-related news-flow will evolve or develop. “If the current import restrictions and tariffs (from solar panels and washing machines to steel and aluminium) result in a world-wide trade war, emerging markets would be impacted, but as part of a global economic slowdown.
“But as indications such as the departure of top economic adviser Gary Cohn and growing opposition within the Republican Party shows, the situation will hopefully be not be as detrimental than initially feared,” he adds. “Clearly China, as the main trading giant in the world, is one of the main targets of the trade restrictions.”
There are positives. Boudewijns believes that trade between emerging markets is becoming more, or at least as, important as trade between emerging and developed markets, in particular the US.
Diversification may be the answer, Stocker believes. “China and Korea will be acutely targeted by the recent metals tariffs with President Trump signalling more developed market allies will be exempt from this trade war.
“Should the trade war intensify, these three countries representing the majority of the EM index will face higher risk premiums and balance of payment pressures. “If one considers, as we do, our universe as an equally-weighted index of nearly 60 emerging, frontier and off-index countries, Trump’s trade war borders on immaterial,” Stocker adds.
“Many of these countries in this construct do not have deep trade links with the USA and have not been explicitly mentioned by Trump as a target, as has China. “Serbia, Georgia and India are examples of significant holdings of ours which would not be impacted,” he says.
