Emerging markets take stock after US poll shock

THE prospect of a Trump presidency may have put a lot of emerging-market expansion plans in the spotlight, particularly among those looking for growth in Latin America and Asia.

Sanlam Emerging Markets CEO Junior Ngulube said at this early stage it was difficult to provide a clear perspective on the impact of Donald Trump’s election.

“A lot will be dependent on what changes Mr Trump and his new administration may wish to make to US policy — particularly when it comes to trade agreements such as the Trans-Pacific Partnership,” he said.

Trump said this week he planned to quit the trade agreement on his first day in office. The trade agreement was signed by 12 countries that, according to the BBC, account for 40% of the global economy.

Old Mutual Emerging Markets’ Latin American operations, particularly Mexico, saw the most volatility. “Mexico’s economy is strongly linked to the US, so Trump’s talks about renegotiating the North American Free Trade Agreement have put the peso under pressure,” said David Buenfil, OMEM’s managing director for Latin America, Asia and joint ventures.

Buenfil said the group hadn’t seen much of an impact in the rest of Latin America and in Asia, although they remained cautious.

Changing US attitudes, said Ngulube, could unsettle markets in regions such as India, Malaysia and the Philippines.

However, Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said it was unclear whether Trump’s protectionist opinions would translate into any action. “Contrary to his claims, American businesses benefit greatly from free trade and they are likely to resist a substantial change in policy. The Republican Party has traditionally favoured free trade and Trump is likely to experience push-back if he goes too far on raising tariffs.”

Countries where foreign positions are larger and markets more liquid — those in Asia, for example — have faced depreciating pressures on their currencies. These include Malaysia, Indonesia, South Korea, the Philippines and India.

Bejoy Das Gupta, chief economist for Asia/Pacific at the Institute of International Finance, said these countries had currentaccount surpluses or small deficits, which meant a small external financing requirement.

“While capital-account weakness stemming from the US policy uncertainty may persist for some time, resulting in periodic surges of portfolio-capital outflows, other parts of the capital account, such as foreign direct investment, should prove resilient,” he said.

Das Gupta said that once the risk aversion subsided, with the negative surprise wearing off, the stronger growth in Asia relative to the rest of the world and attractive valuations and yields should spur non-resident private capital flows to the region.

The IMF forecasts growth in India to be 7.4% in 2017, down from 8.1% projected for 2016. Despite the slowdown, India is still the world’s fastest-growing economy. China’s growth is expected to slow down slightly to 6.1% in 2017 from this year’s projected 6.4%.

This presents a strong case for Sanlam and Old Mutual, which both have operations in India. Old Mutual also has a partnership in China with Guodian Life Insurance Company.

Even in the face of slowing growth, the rate is higher than what is projected for South Africa and Africa as a whole. South Africa’s growth is expected to be a low 0.1% for 2016 and 1.1% for 2017.

This, together with forecasts by the IMF that project a downward growth trend for most African economies, might cast a shadow of doubt on the idea of seeking growth in Africa. However, Ngulube said, the insurance sector had proved to be resilient.

“Strategically, Africa is very important to us,” said Ngulube. “Despite the increasingly negative sentiment around the ‘Africa rising’ story, Sanlam remains bullish about the future of the continent.”

In all the uncertainty and noise around the US president-elect’s policies, emerging markets should not be too concerned about longterm prospects.

Das Gupta pointed out that emerging markets were a key part of the global supply chain, with around 40% of global GDP accounted for by emerging Asia.

A significant portion of emerging-market trade and financial flows originates from other emerging markets through foreign direct investment and portfolio flows.

“Emerging markets are trading and investing in each other, besides being a key part of interconnected global supply chains, which cannot be dismantled so easily,” said Das Gupta.

While the advocates of globalisation may be on the defensive, if Trump implements his proposed policies, emerging-market economies would need to be supported if there is a negative impact.

“It is hard to imagine that [globalisation] will be done away with any time soon without having a severe adverse impact on countries such as the US,” said Das Gupta.

Strategically, Africa is very important to us. Sanlam remains bullish about it