The election of Donald Trump as president of the United States is certainly not without potential knock-on effects for the developing world, particularly if he makes good on his campaign promises to implement a programme of infrastructure investment, funded by fiscal expansion, which could potentially encourage steeper US rates.
However, we wouldn’t recommend a blanket diagnosis of emerging-market fortunes. We continue to see a number of highly selective opportunities in this diverse segment, and there are areas which we believe should be largely insulated from the effects of potential policies espoused by Trump on his campaign trail.
An Indian escape
Overall, we expect the president-elect to prove more pragmatic in office than his previous rhetoric has implied. Nevertheless, Trump’s election campaign was dominated by isolationist, anti-globalisation language, which, if more than just hot air, will have serious implications for world trade.
We believe India, in which one third of our core Global Emerging Markets strategy is invested, is likely to be protected from potential Trump effects.
The country benefits from an internally driven economy, and is in greater control of its own destiny through its execution of reforms. Take, for example, the recent decision by the government to withdraw larger-denomination notes from circulation – a story which was buried by the US election result. The motivation behind the move (which affected around 86% of the value of notes in circulation) was to undermine the black market by preventing big-ticket purchases like land, vehicles and property being hidden and therefore escaping the attention of tax authorities.
Within India, we are predominantly invested in a diversified group of consumer-facing companies, which we expect to benefit from a pick-up in demand, driven by low leverage, improved consumer sentiment under the stable Modi government, and pent-up demand from several years of recession following the financial crisis.
The great wall of… Mexico?
Mexico has been an economy under scrutiny after Trump’s infamous pledges to build a wall between the US and its southern neighbour grabbed headlines in the run up to the vote.
As you might expect, in the aftermath of his victory the Mexican peso plunged against the US dollar. Our preferred area of investment in the country is related to the consumer, and we expect this sector to benefit from a number of factors. First, we expect remittances (earnings sent to families in Mexico by overseas workers in foreign currencies) to continue to play a key role in offsetting peso weakness. Added to this, the consumer has been further supported by credit expansion from very low levels, youthful demographics, real wage growth and employment growth.
Rejecting the North American Free Trade Agreement (NAFTA), as Trump has pledged to do, may prove difficult to achieve.
While NAFTA has been undeniably positive for Mexico, owing to the manufacturing expansion by US companies in the market, the US has also profited from the arrangement, in particular from the country’s low-cost labour. Further, the relationship is based on more than just a cheap labour force: Mexico is the US’s second-largest export market, and 40% of the content of Mexican exports is comprised of US inputs.
Added to this, the relationships supported by NAFTA are very different to the outsourcing arrangements US companies have in Asia, where another company does the assembling or manufacturing. The level of integration between the two countries’ manufacturing industries is more pronounced: in Mexico, US companies have invested time and money in building factories and hiring skilled staff in the local market.
To make matters more difficult still, if Trump repeals NAFTA, he will have to contend with some very angry businesses, many of which are owned by Republicans.
We expect the more likely result is that NAFTA is renegotiated in some form, perhaps with the inclusion of tariffs. In this event, Mexican labour would still be significantly cheaper. Using the auto industry as a case study, Mexican autoworkers are now paid an average of $4-5 US dollars an hour compared to $27-28 for their American counterparts.
However, total labour costs including wages and benefits average $8 an hour in Mexico vs. $58 in the US for General Motors. Even at Volkswagen’s factory in Tennessee, which has the lowest hourly cost in the US according to the Center for Automotive Research, this figure stands at $38. Interestingly, since the election, carmaker Ford has already confirmed that its plans for a new small vehicle plant in Mexico to start production in 2018 will go ahead.
Taking on China
While much has been made of Trump’s apparent desire to improve Russian relations, he has taken a far less friendly approach to China, threatening to place sizeable tariffs on Chinese goods and to call it out as a currency manipulator.
We expect Chinese exporters could have a tougher time in the near term, especially since they have already seen an increase in wage costs, which is impairing their competitiveness in some sectors.
Within our core Global Emerging Markets strategy, we have approximately 95% of our China exposure focused within domestically driven consumer-related sectors – health care and e-commerce – and thus largely unrelated to the export sector, and, more importantly, unrelated to whoever is in the White House.