Forget Trump, Brexit and European elections .... the real action's been elsewhere

Monday 3rd April 2017

Forget Trump, Brexit and European elections .... the real action's been elsewhere

ref :- "Some emerging markets are more stable than ever" , Tom Stevenson in the DailyTelegraph, Business Comment

Our thanks to Tom Stevenson of Fidelity International for highlighting something that of course we were aware of, but have probably failed to give due attention. The only mitigating factors might be that we're not the only ones  As Mr Stevenson points out, "quite often in investment, the interesting story happens while you are looking the other way", and that this particular story is not over yet.

We're talking about emerging markets, of course. Whilst much of the world has been obsessing with record-breaking US stock markets and resurgent European ones, the truly stellar performance has been seen in emerging markets. In percentage terms, taken as a broad aggregate they have risen by about 12% this year, about double the rise seen on Wall St and four times that of London's FTSE 100 boosted by Brexit-related currency weakness. This is definitively NOT what most of the gurus were predicting at the turn of the year. Remember, Donald Trump had recently been elected with an "America First", protectionist agenda that did not seem to augur well for emerging markets.

Specifically, the prevailing and undeniably logical wisdom had it that there were two main issues that would undermine emerging markets. They can be summed up as "Trade", and "Taper". On trade, the incoming president was promising to take a scythe to the free-trade / low tariff regimes that emerging markets need to prosper. And Taper ? A reference to the Taper Tantrum of 2013, the belief in many quarters was that rising US rates would damage nations with high levels of dollar-denominated debt, and those exporters of commodities that fall in value with a strong dollar  --  emerging markets, in other words.

At the start of the second quarter, that's not the way that things have turned out. Mr Trump's sabre-rattling on the trade issue has proven more talk than action up til now at least. If it's pushing it to believe that the President has sensibly modified his stance having assessed the realities of his position, you could believe that the extent to which he can fulfil his any of his promises must be in doubt given the failure of his first two sallies into the issues of immigration and healthcare. And for the second year in succession, despite expectations of continued strength the Dollar has actually fallen in value, particularly against many emerging market currencies. Think Peso, Rouble and even the Rand. Even in the midst of huge political uncertainty in South Africa and a fall over the last week, the Rand is still almost 20% stronger versus the dollar than it was in May 2016.

Actually, speaking of South Africa and concerns of political turmoil ushers us back to another point made by Mr Stevenson : it may be time to reassess long-held preconceptions about political stability and the comparisons on that front between emerging markets and the so-called developed world. There will of course always be examples of emerging markets "going bad"  --  at present we might look at Venezuela, or even Turkey -- but they are the exception to be wary of rather than the rule.  Not everyone will be too enamoured with everything they represent but the two enormous economies in the vanguard of emerging markets, China and India, are the epitome of stability  --  China through authoritarian 5 and 10 year plans and India through PM Modi's huge electoral popularity.

Compare that with what's going on in what has traditionally been assumed to be the safer markets : Brexit, Trump, the rise of a populist right in European elections, Greece. Without being too flippant, one might reasonably ask the question : which area is it exactly that's supposed to be the more stable for my investment ?

But back to Trade and Taper .... As far as the latter goes, of course a sharp and extended rise in US rates and the Dollar would ring alarm bells for emerging markets, but the truth is that historically they do pretty well when US rates rise gently. And anyone who's been on Fed watch since the March rate rise would say that the overriding theme of utterances from Fed personnel has been one of a gradual approach to higher rates. (NOTE : On that topic, watch out for minutes of the Fed's March meeting to be releases Wednesday evening, and March US employment data on Friday).

Trade is a trickier issue, but Mr Stevenson considers concerns to be overstated and gives three reasons why a trade war is unlikely : 1. In practical terms, Mr Trump's powers are limited  --  tariffs aimed at China can be circumvented (through Vietnam, for instance). 2. Import duties like the mooted Border Tax would push up costs for US consumers, hitting Trump voters the hardest. 3. China would not meekly back down if faced by protectionist US measures, but more than likely retaliate. The damage to US exporters like Boeing and General Motors would mean US jobs, far from being protected, would be lost.

Funds flowing into the EM asset class have been at their strongest on record, according to Morgan Stanley. If that makes you think that you've already missed the boat ..... maybe not. Emerging market shares are only at about the same level as they were in 2009, and by most measures about 25% cheaper than in the States. The advice is, for those of us fixated on Europe and America it may pay to look "further afield"