“Despite widespread nervousness, emerging markets could benefit from a second Trump presidency.” This is what he claims Christopher PreeceMacro Strategist & Investment Manager at Pictet Asset Management. “Over the longer term, his global strategy risks weakening the dollar, which would be good news for emerging market assets. At the same time, the poor dynamics of the US debt, the situation of which will probably worsen under the new administration, will help to shed a positive light on the emerging market sovereign debt – underlined the analyst –. Volatility will almost certainly increase in the short term, especially in the first months after his inauguration, and the disruption will not be limited to just a few countries. If many are ready to make concessions of a commercial nature, and not only, to avoid the promised tariffs, others, such as China, will probably bear the brunt of any trade war unleashed by Trump.”
The impact on currency markets
“The heavier the customs duties, the more likely the dollar will appreciate, at least initially – said Preece -. Currency devaluations elsewhere will put a strain on foreigners who have borrowed in dollars, particularly those residing in emerging economies.” “Probably Trump will exploit customs duties as a negotiating weapon to obtain concessions from trading partners, but is also intent on not making the dollar rise too much – he added -. The desire to bring manufacturing back to the United States must not come at the expense of their international competitiveness. The result could be a first step toward a new currency management arrangement designed to weaken the dollar.”
The role of the US budget
“Despite his promise to make government more efficient, Trump is though constrained by huge items of government spendingsuch as that for social security – the analyst pointed out -. At the same time, he will push for tax cuts. Based on the forecasts of Congressional Budget Officethe United States has accumulated a debt equal to 100% of GDP, and if all of Trump’s policies are actually implemented, the deficit burden could grow further to 143%. A US debt crisis would be devastating for global assets, but it is an extreme scenario unlikely to occur in the near term. There continued erosion of the US debt positionwhich makes them increasingly less attractive to savers globally, should be positive for emerging marketswhich increasingly present the key attributes to attract investors. This is because emerging markets are increasingly important in a global context.”
The other growth factors
Finally, according to Preece, emerging economies are destined to grow also thanks to other factors: their institutions are increasingly credible, central banks, for example, have reacted more quickly to the surge in global inflation and have since been in a better position to ease monetary policy; debt metrics and fundamentals appear better than those in developed markets; finally, these economies have a lighter debt burden, faster growth rates and better demographic prospects. “These factors are already starting to be felt by professional investors, with sovereign funds increasingly orienting their portfolios towards emerging countries,” he underlined.
