Fears that US president Donald Trump’s administration poses a major threat to emerging markets are overblown, says Phil Yuhn, fund manager in the Man GLG Emerging Markets Debt team.
Yuhn says that while Mr Trump could yet challenge the EM Debt team’s outlook for the asset class, the president’s ability to introduce protectionist measures are more limited than many assume.
“Trump does represent something of a threat to our view,” says Yuhn. “We believe, however, that many of the protectionist threats he made while campaigning – which would be negative for emerging markets, for which an open America is financially vital – could only be enacted in diluted form by president Trump.”
Yuhn points to a recent study from the Peterson Institute of International Economics which examined the impact of implementing Trump’s campaign promises of significant tariffs on Mexico and China. The study found these pledges, if enacted, would take the US close to 2008 unemployment levels, with manufacturing hardest hit followed by a second order effect on consumer services.
“Not only are those most likely to be affected a core part of Trump’s voting base but, even if he did decide he wanted to proceed unilaterally by executive orders, he would likely have to contend with multiple lawsuits obstructing him,” says Yuhn.
Trump’s mandate is also not nearly as strong as he would like to believe, the manager argues, pointing out that both Congressional majorities are below those of Barack Obama when he came to power in 2008. “Trump did not win the popular vote and his Congressional majorities, especially in the Senate, are very thin. There will definitely be some move toward tariffs but we do not believe it will be anything like as profound as some have suggested.”
Yuhn also doubts the consensus view that the US dollar is likely to stay strong or even appreciate further in a Trump administration. “The currency is currently at a similar level to where it was in the late 1990s on a trade weighted basis,” he says. “Despite this, US real rates are far lower today than they were back then.”
Yuhn argues that the dollar’s 1990s peak coincided with extreme productivity gains which he feels are unlikely to be repeated; in addition, population demographics and immigration policies are less favourable today. “This suggests to us that the current US dollar valuation is too high” he says. “EM foreign exchange, on the other hand, is in many cases below even its global financial crisis troughs, despite economic improvements. Our positioning indicator suggests to us that the wider market is greatly underweight local currency EM debt. This is a bandwagon we are refusing to board.”
More broadly, Yuhn believes the major EM economies are more resilient today than they were 20 years ago, when a series of crises and defaults led many developing countries to enact wide-ranging reforms to improve their financially credibility. “Such was the success of these initiatives that by 2013 around 70% of the EMBIG index was investment grade,” he says. “This has since reversed and the level now stands at close to 50%, but the major EM economies are much better positioned today to withstand headwinds than they were in the past in our view.”
Yuhn points out that inflation and FX reserves metrics for many countries have improved dramatically in the last two decades. Mexico, for instance, has brought inflation down to 3% from 52% in 1995, while Russia has built up reserves of $391bn from scratch over the same period, even after the recent oil sell-off. (cite sources and as of date)