Are emerging markets likely to be Trumped?

Reflecting both fear and uncertainty, global markets were quick to react to the news of Donald Trump’s election. Asia, the US, Europe all came off, whilst gold and other perceived safe haven status assets rallied. However, as markets have digested the news many of the initial moves have since reversed, with US equities, initially one of the largest laggards, actually coming out on top.

A simple explanation is that Trump is known to be business-friendly and has a strong desire to reinvigorate the US economy.

Now, what does this mean for global investors? It is still too early to draw firm conclusions, but a major concern has been Trump’s talk of replacing international trade agreements (for example, NAFTA and the Trans-Pacific Partnership) in favour of bilateral deals, and the potential damage this could cause to global economic activity.

One area cited as vulnerable has been frontier and emerging markets. Their low labour costs can allow them to undercut US producers and their relatively limited negotiating positions are perceived to make them natural targets. However, these markets tend to be more economically isolated and less dependent on the developed world; and aside from this have many structural advantages over the US and other developed nations, which will allow them to grow at a higher rate.

For example, in addition to low labour costs, they tend to have young populations; they are not bogged down by pension deficits and expensive welfare systems; and they can also grow significantly as they industrialise and liberalise their markets, improve their political systems and weed out corruption. 

INDIA HAS SHINED

India’s performance in recent years provides a very good example. Under prime minister Narendra Modi, India has made strides in reforming its political systems, rooting out corruption and liberalising markets. The benefit is that, according to the IMF’s World Economic Outlook (WEO) for October, India is projected to grow at an annualised rate of 7.8 per cent between 2017 and 2021 – way ahead of the developed market average of 1.8 per cent.

Political and economic risk is elevated in emerging and frontier markets, which means that it is important to take a portfolio approach and it usually makes sense to subcontract this to a professional manager with the skills and resources to analyse these less well-researched segments of the market.

QuotedData does not give advice to non-professional investors, but nervousness about Trump’s presidency has affected the valuations of some investment trusts, so we have included a few examples.

VALUATION GAP HAS OPENED UP

India Capital Growth (IGC) is currently trading at a discount of -18.5 per cent (as at 30 November), despite having superior performance to its immediate peers. The portfolio is focused on medium and small cap stocks that the managers believe will benefit from the Indian growth story and so should be relatively isolated from developments in the US.

Aberdeen Frontier Markets (AFMC), is a fund of funds trading on a discount of -4.3 per cent (as at 30 November), which gives exposure to over 500 underlying listed frontier markets companies spread across a diverse range of sectors and geographies. A valuation gap has opened up between frontier and developed markets, but AFMC’s managers see the potential for a strong recovery should a rebound in earnings growth start to emerge. In the meantime, they expect that investors will be able to benefit from an attractive yield offered by companies in these markets.

Another interesting trust is Pacific Horizon, which focuses on the Asia ex-Japan region (emerging Asia), a segment of the market that has been left behind as markets have recovered. The fund, which is currently trading on a discount of -1.8 per cent (as at 30 November), targets fast-growing companies. The manager is focusing on technological themes that he thinks will radically alter all our lives and he believes that, despite the talk of reinvigorating the US economy, Asian companies will often be at the forefront of these developments.

Matthew Read is a senior analyst at QuotedData.


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