President-Elect Trump: Good or Bad for Emerging Markets?
December 7, 2016
There is a change in the political heavens….Some stars fall out.
– Garet Garrett, “A Bubble that Broke the World”, 1932
The terrible art of the candidate is to coddle the self-deception of the stooge
– Boris Johnson, “Oxford Myth” 16th June 1988
The higher they go the liar they get
– Philip Fisher, “Common Stocks and Uncommon Profits and Other Writings”, 3rd Apr 2015
Unsurprisingly, one of the most frequent questions asked of us at the moment is whether President-Elect Trump will be good or bad for emerging markets. Many think he will be bad. Trump is a divisive character, a political wildcard, and outspoken against free trade. He has also said a few things that Mexicans, Chinese, women, immigrants, intellectual people and Muslims (amongst others) have reservations about. For Mexico, question-marks over the North American Free Trade Agreement (NAFTA) come at an unfortunate time, when the escalation of drug cartel wars might anyway have jeopardised its relationship with the U.S. The situation for Mexico is very difficult, and we are fortunate not to have any investments there for the time being.
However, for the rest of the international markets, we stick to the position we staked out before the election results, which is that whether Clinton or Trump won, the change of president would likely be positive overall for international markets. The simple reason for this is the changing tide of policy from fiscal austerity to fiscal largesse.
The U.S. is not alone in this shift. As we mentioned at the time, the exit of George Osborne from the U.K. Treasury was another marker of the change. Both the Clinton and Trump campaigns implied a larger deficit, and Trump’s policies on tax and infrastructure spending should not disappoint the Keynesians (though reading Martin Wolf’s reaction in the Financial Times, it seems like they have).
The policies to set against these are Trump’s attempts to repatriate U.S. capital and his isolationist, anti-free-trade positions. I would point out that capital repatriation is not what it seems in a world where almost all U.S. companies keep their overseas cash assets in dollar denomination anyway. And isolationist, anti-free-trade policy is not what it seems in a world where emerging markets like China want to construct their own version of a Trans-pacific partnership (indeed TPP was partly encouraged to counter Chinese proposals for an ASEAN trade block that excluded the U.S.). In any case, Trump’s proposals on tax are in sync with his party’s, whereas his proposals on trade are not. Part of the reasoning that fiscal easing is good for international markets is contained in the chart attached, which we have been publishing for the last three years. The main risk I can see to this view depends on the impact of interest rates, which is too large a topic to deal with here, although we touched on it recently.
Amongst the portfolio, problems for PLDT, the Philippines telephone company, have gotten worse. Having booked large losses from non-core investments earlier in the year, the company now faces a change in the regulatory environment: the new president, Rodrigo Duterte, is sounding out plans to open up the industry to more foreign competition in order to increase telephone infrastructure investment. Whilst the plans are unlikely to work, they are likely to reduce returns in a sector where the returns were already falling. For the portfolio, the silver lining is that we had already reduced exposure to PLDT following a review earlier in the year, so the impact is less than it might have been.
On the other hand, we have added to PZU, the Polish insurance company, which had also been a problem earlier in the year because of a change in tax regimes and strategy. We are more optimistic about this company, because we see a lot of value, though not always sense, in their strategy to consolidate the banking sector. It is also worth noting that though the month’s relative performance has been fine, Turkey and the lira continue to detract from short-term performance. Otherwise, we are comfortable that the portfolio continues to zig more or less whilst the index zags.
Finally, it is worth wondering, in such a gloomy month, whether, correction pending, we have entered into the first phase of an emerging market bull market. Perhaps I am blinded by the selective, but Hungary is in a bull market, India probably so; Brazil is positioning to follow. Only the Chinese banking sector looks ready to collapse. Even Greece may be ready to participate in two years’ time.
-Edward Lam, Lead Fund Manager
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