Why emerging markets remain strong despite Trump's tactics

Expert working on only a 20% probability that countries will descend into a trade war

Why emerging markets remain strong despite Trump's tactics

A potential trade war remains the biggest threat to emerging markets but investors appear to be increasingly wise to President Donald Trump’s aggressive tactics.

Laurence Bensafi, deputy head of emerging markets, RBC GAM, agrees with economists and is working on a 20% probability of a tariff fallout. However, she believes that last week’s inflow of around US$3 billion suggests people do not see this as the most likely outcome.

She said: “I think people look at this 20% probability and there’s a risk but it’s a low risk, and in the end there’s a lot of tactics. Even though the 20% risk is really scary and could have a big impact, I think people are still comfortable it’s not the main scenario.

“If that probability was to move towards 40%, that’s when you could see a big selloff and people exiting the asset class.”

Recent tensions around trade, the US-China relationship and Trump's threat of sanctions on Russia, which affected the ruble, have given emerging markets a headache over the past few weeks. But Bensafi said the signs are positive for a return to relative calm, while people waiting on the sidelines seem confident that the story of economic growth has not changed since the beginning of the year.

Bensafi added that Trump’s aggressive approach is no surprise and that a trade war against China, with tariffs imposed on both side’s imports and exports, would in turn hurt economic growth, keep interest rates low and probably lead to a rotation of equity into fixed income.

However, she stands by her early-2018 prediction of about a 20% return for emerging markets with the caveat that this year will not be a straight line like 2017.

She said: “Things are definitely looking better than a few days ago for our asset class and if we don’t see any more negative news, then the scenario we had at the beginning of the year will still apply.”

She added: “I would advise clients to hold on to their exposure. Valuation wise we’re not at extremes by any means, and weren’t even before the markets got wobbly. Actually, if you look at it, the markets have held on very well – it has not been a total disaster.

“With the US dollar, we are still in a slightly positive area for emerging markets so we are nowhere near panic. Actually, there are some interesting numbers. All the way through the crisis of the past few weeks, investors have been adding to emerging markets.

“I saw the numbers for last week on Friday and I think it was about US$3 billion flowing into emerging markets, which is above average for a week.”


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