US election: EM worry as Trump puts globalisation in reverse

The “downbeat mood” in financial markets, which has caused a ‘risk-off’ move by investors, could last several weeks, said a large UK asset manager this morning amid a flurry of emerging market forecasts for Donald Trump’s victory.

Standard Life Investments said that if the Trump administration pursues an aggressive unwinding of polices that have supported globalisation, “an extended period of weakness for risk assets is likely”.

In his campaign leading up to the presidential victory, Trump suggested scrapping a number of free-trade agreements, including the North American Free Trade Agreement that exists between Mexico, Canada and the US.

Emerging markets are likely to see the greatest impact of any rolling back of globalisation themes, said Columbia Threadneedle after seeing Asian markets and the Mexican peso fall this morning. The Mexican central bank has called an emergency meeting.

“China will be a particular concern given Trump’s rhetoric regarding trade and tariffs,” the firm said, and added that further elections in Europe may see the anti-globalisation theme continue.

Mexico, China and Russia are all significant areas of investment across Baring Asset Management portfolios and Michael Levy, frontier and emerging markets investment director at the firm, said these are three markets where the Trump presidency could have a major impact.

For example, Trump has spoken of introducing a 45% tariff on Chinese imports to protect America jobs and there is the possibility of a trade war.

“If we do find ourselves in a trade war, Chinese authorities would likely act to stimulate demand, but the Chinese equity market, which has performed well in recent months, could become increasingly volatile,” said Levy.

Monica Defend, head of global asset allocation research at Pioneer Investments, said: “The US election outcome may lead to increased interest rate volatility which may weigh on EM [emerging market] currencies, while a strong shift to protectionism may also hurt many export-oriented EM companies, not only in Mexico.”

Peter Hensman, global strategist for real return at Newton Investment Management, flagged up the potential for the dollar to strengthen against emerging market currencies. “More US dollar strength relative to emerging markets seems likely as US capital retrenches from the rest of the world.”

However, dollar weakness in the aftermath of the election is a positive for emerging markets, suggests Trevor Greetham, head of multi-asset at Royal London Asset Management.

“We are likely to add to our overweight in the emerging markets equities, where dollar weakness is a positive,” he said this morning.

Emerging market assets have been in high demand this year. At a Funds Europe emerging markets roundtable yesterday (to be published in December) participants agreed that the longer-term fundamentals for emerging market growth were robust and one person argued demand from Western countries was not critical to success.

©2016 funds europe

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