What’s happening in emerging markets?
For much of 2016, emerging markets have performed well. Higher oil prices and a steady dollar have allowed these markets to stabilize and even do slightly better as the year progressed.
But the election of Donald Trump and Republican majorities in both houses of Congress on November 8 may represent a pivot point. There is potential for significant fiscal stimulus, protectionist trade policies, and a different outlook for interest rates by Fed. Winners and losers among the various markets may vary dramatically going forward.
The most important variable for emerging markets is trade policy. Protectionist policies will especially hurt countries that depend on exports to the US for their growth, like China, India, and Mexico. On the other hand, relatively closed countries that less dependent on trade — like Brazil or Columbia or many African nations – will tend to do better. Also, Fed policy and the value of the dollar will have a major impact. If the Fed raises rates aggressively and the value of the dollar rises, that will be quite negative. Many developing nations have debt denominated in dollars and will struggle to service their debt if the dollar goes up.
The good news is that most emerging markets come into the present situation with relatively attractive valuations. The dollar’s rise since 2014 – along with other factors – has caused those markets to pull back. In addition, emerging markets have more growth potential than elsewhere.
Emerging Markets. Source: Bloomberg
Donald Trump’s election has caused many investors to pull back from emerging markets. But all markets are not created equal. Differing economic structures will lead to differing outcomes for different nations. The prospects are far more nuanced than they have been in the past.
One thing is certain: the election has made investment analysis a lot more complicated.
Douglas R. Tengdin, CFA
Chief Investment Officer