InvestmentEurope has canvassed views of asset managers and fund selectors on the emerging markets universe in light of the policies emerging from the Trump administration.
Starting the series, Patrick Mange (pictured), head of Investment Strategy for Emerging Markets at BNP Paribas Investment Partners, assesses it is yet too early to know which macro and fiscal policies the Trump administration will implement, or within what timescale.
He says that if no concrete action has been taken thus far, emerging countries likely to be most impacted by any policy that could be further implemented by the Trump administration remain the ones with strong links to the US via trade in goods and services, direct investment or heavy dependence on the US as a source of external debt funding.
In that context, emerging countries that are favoured by Mange respond to four criteria.
“We prioritise emerging countries that first do not essentially depend on external funding to grow – now especially US financing, second are relatively closed economies, third have relatively strong net international positions and fourth are at limited risk of trade conflicts with the US.
“Since none of the emerging countries in our universe, the MSCI EM, meet all criteria, we also take into account other considerations, for example monetary policy, the commodity component of exports or the implementation of structural reforms to determine portfolio positioning,” BNPP IP’s EM strategy chief explains.
The manager is currently underweight Mexico despite, Mange says, the fact that “Mexican stocks are looking increasingly undervalued, since this is the country in our universe the most geared towards US.”
Other underweights include Turkey, South Africa, Colombia and Brazil. On the opposite, BNPP IP is overweight India, Russia and China, either because of the size of their economies or their low dependency on the US in relative terms.
“We are also overweight Peru, which is one of the fastest growing LatAm countries, has decent external financing fundamentals and is a commodity exporter,” Mange adds.
LatAm : Limited Trump impact outside Mexico
BNPP IP’s head of Investment Strategy for Emerging Markets pinpoints there is no doubt an eventual US withdrawal from regional trade agreements such as Nafta or the TPP, or the introduction of a border adjustment tax in the US would impact LatAm, “especially via Mexico (NAFTA and TPP) and to a lesser extent via Chile and Peru (TPP).”
“However, outside Mexico, where roughly 80% of exports go the US, we expect the impact of such measures to be rather limited. Most of the bigger LatAm countries post a trade deficit with the US. Also, many products that LatAm exports to the US, notably commodities, have little or no substitute.
“Moreover intra-regional trade in Latin America is rather low, at around 30% of total trade, compared to around 65% in the European Union for example. It is also worth noting here that for LatAm as a whole, commodity exports towards the US are likely to increase in volume terms if the US, as promised by Trump, boosts infrastructure spending,” Mange says.
China: No hard landing for 2017
China, which is part of BNPP IP’s overweights at the moment, will not experience a hard landing this year, BNPP IP’s EM strategy chief believes.
He estimates that ahead of the 19th Party Congress in late autumn 2017, the government will aim to minimise economic uncertainty in order to smooth the political transition.
The main goal for the Chinese government he says will be to maintain GDP growth at around 6.5%, essentially through increased fiscal spending and more or less stable financial conditions, but also limit volatility on the renminbi likely through tougher capital account controls.
“The bulk of “supply-side reforms” and debt deleveraging measures will likely be postponed to after the Party Congress. In fact, there have been many hints in the recent past indicating that political authorities are very aware of the constraints on growth imposed by over-capacities and excessive debt essentially in state subsidized sectors.
“This makes us believe that at last these issues will start to be addressed for good in 2018. This will be likely be welcomed by markets even if it implies a slower rate of growth quite a number of years,” says Mange.
India : reforms are positive on mid term
BNPP IP keeps a positive stance on India as it currently ticks all four boxes of the manager’s criteria regarding emerging markets.
Mange explains that the demonetisation program that has withdrawn 86% of Indian notes in circulation has slowed down the country’s cyclical recovery.
But according to him, this reform is very positive in the medium term because it will “shrink the uncontrollable black economy, foster a more efficient cashless economy and as a result lead to higher tax revenues, which in turn will help reduce government imbalances and finance much-needed infrastructure projects.”
He adds that the parliamentary approval of the Goods and Service tax (GST) last Summer, which is transforming India into a single market, will also dramatically increase the economy’s efficiency hence raise potential GDP.
“Yet the market is amongst the most expensive within our universe, but we believe for good reasons,” Mange comments.
Russia : uncertainty around the Trump-Putin relationship
Russia could be one of the EM winners this year. The rise in oil prices will definitely benefit to the Russian economy, which remains heavily dependent on fossil fuels, BNPP IP’s EM strategy chief notes.
“However, even before oil prices started to pick-up again Russian economic momentum began to improve while inflation was receding. This opened a serious window for the Central bank to ease its rather tight monetary stance and support fixed income and equity markets, both then relatively cheap compared to theirs peers.
“Since additionally Russia, which is proactively reducing its dependency on external financing, scores comparatively well on the four criteria listed above, we decided to move it to our long portfolio some time ago already assuming then that oil prices had seen their lows. Their recent rise is just reinforcing our conviction on this country,” he argues.
Mange remains however cautious regarding the evolution of the US-Russia relationship. He says thinking the Trump administration has a more constructive bias towards Russia than the Obama administration is s a market belief surrounded by much uncertainty and speculation
“Our overweight in Russia is based on considerations other than speculative ones, although we acknowledge that politics often has an impact on a country’s risk premium,” Mange concludes.