Will Donald Trump undo the recovery in emerging markets?


Claudia Bernasconi, Senior Economist Emerging Markets of Swiss Life Asset Managers

After the difficult year 2015 and the dramatic start into the year 2016, emerging economies improved significantly during the course of last year. The fundamental situation of these countries has strengthened: They have mostly digested the shock of lower commodity prices. Political tensions in countries like Brazil and Russia have peaked. Moreover, the situation in China has stabilised. The most important question after the surprise election of Donald Trump is, whether his presidency will undo this recovery.

A “tamed” Trump does not prevent the growth recovery
A lot of uncertainties regarding Donald Trump’s future policies remain. Yet, we expect him to implement less extreme measures than what he announced during the campaign. His rhetoric changed after the election. Moreover, checks and balances will “tame” the President-elect. Such a “tamed” Donald Trump should not prevent the growth recovery of emerging markets, which has started in early 2016. The recovery is mostly driven by the phasing-out of the recession in Brazil and Russia. These two major economies were hit by big shocks: the fall of commodity prices and severe political tensions. The fading out of these shocks provides a relief to growth of emerging markets. A “tamed” Trump is not as big of a shock to overall emerging markets growth as one of the most severe recessions in Brazil and Russia. Therefore, we do not expect him to undo the recovery. Yet, we have always anticipated the recovery to be slow as various problems remain, such as low commodity prices and political as well as structural issues. A Trump presidency will add further difficulties.

How does a Trump presidency affect the emerging world?
Overall, the victory of Donald Trump is bad news for emerging markets. Yet, the impact on individual countries varies significantly. There are four main channels: First, external vulnerability is back in focus. As in 2013, US interest rates are rising and the Dollar is strengthening. This pressures countries with high current account deficits and external debt, such as Turkey or South Africa. Second, potential protectionist measures would weigh on countries with strong trade links to the US, such as Mexico or China. Third, the security situation of Eastern Europe depends on the role of the US in NATO. Finally, metals prices surged in anticipation of US infrastructure projects. This dampens the negative impacts as copper and iron ore exporters benefit.

China’s government “tames” the slowdown
The Chinese government successfully stabilised growth. The stabilisation is however not sustainable as it was driven by the old-style model of debt creation, infrastructure spending and a revival of the real estate sector. We expect growth to slow again in 2017. The government will however “tame” the slowdown upfront to the important congress in autumn. The strengthening of the Dollar after the US elections put a lot of pressure on the Yuan. The central bank tries again to counter a too strong depreciation. Finally, we do not expect Donald Trump to use harsh measures against China as the middle kingdom is too important for the US and the global economy.

Are emerging markets’ assets still attractive?
2016 will mark the first year after the great recession, where the growth differential between emerging and developed economies clearly rises in favour of emerging markets. According to the IMF, the difference should increase steadily over the next few years. This makes emerging markets attractive from a fundamental point of view. In addition, emerging countries have lowered their vulnerability to rising US interest rates. Many countries have reduced their current account deficits since 2013. This raises their attractiveness, in particular for fixed income markets, as we do not expect a rapid increase in US interest rates. As credit spreads have significantly tightened in some parts of the emerging world (e.g. Asia) in December 2016 the scope for further tightening is limited in these markets. Other regions, such as Latin America or Eastern Europe, remain more attractive on a relative basis. We expect increased volatility in the short-term in all regions. As discussed above, there is a large dispersion among emerging countries and an active investment management would be even more important in the current environment.