Trump vs Emerging Markets: forces at play
The story of emerging markets as an asset class is, to a significant degree, the story of globalisation. Between 1990 and 1995, China moved to an export-led growth model under Deng Xiaoping, India saw dramatic economic reforms under Narasimha Rao and joined the WTO, Apartheid ended in South Africa, Russia moved from state socialism to a market economy and Mexico signed NAFTA.
In the two decades since, emerging economies have delivered strong economic growth and investors in emerging markets have enjoyed healthy (if volatile) returns as that economic growth fed through to corporate earnings.
Now, however, the change in the domestic politics of the United States may undermine this powerful story. President-elect Donald Trump has talked about the US withdrawing from trade agreements and imposing tariffs on imports. Were this to come about, it would be negative for emerging market assets. But there are reasons, we feel, why the final trade policies of the Trump administration may be less severe than those mentioned during the election campaign.
Firstly, it is not only emerging market exporters who have benefited from global trade. US consumers have seen prices for many goods either fall relative to incomes, or even fall outright. In the US, the price index of consumer durable goods rose at an annual rate of 2.5% between 1959 and 1995. Since then, they have declined at an annual rate of 1.9%, to the massive benefit of US consumers. Put another way, an unwinding of the gains from globalisation implies that the price of consumer durable goods in the US will rise by 55%. Such policies are unlikely to prove popular.
Secondly, the idea that economic activity can be moved from emerging markets to the US is contradicted by industrial realities. In particular, we see no prospect for the deep networks in the East Asian technology industry to be rebuilt inside the US.
From Japanese and Korean product designers, to the Taiwanese and Korean semiconductor companies, to the huge set of component manufacturers in the region, and ending with the mostly Chinese-based assemblers (such as Foxconn, with its 1.3 million employees), this global-scale network exhibits a high degree of interdependency that will defy efforts to restructure it. The US has neither the labour pool nor the expertise to replace firms like Taiwan Semiconductor Manufacturing Company, Samsung Electronics and Foxconn in the electronics industry. This is particularly important to emerging market equity investors, given the heavy weighting of technology exporters in the MSCI Emerging Markets Index.
Thirdly, emerging markets do not represent only a source of production. The growth in emerging market domestic demand has been a great opportunity for developed market companies, particularly American ones. Taking two high-profile examples, Apple gets 24% of its revenues from the emerging Asian region alone, while Boeing gets over 30% of its revenues from emerging markets. US protectionism would almost certainly be met with similar sanctions from China and other emerging markets, hitting high profile American companies and, again, generating opposition to protectionism from within the US.
2017 poses a number of global political challenges for investors, some of which may prove serious, but we feel that the risks from growing protectionism are overstated.