Until we have greater visibility into President-Elect Donald Trump’s economic policies, it is difficult to predict what he will do as president. However, the basic tenets of his “Make America Great Again” platform point to broad headwinds for emerging markets.
The populist, anti-globalization sentiment that led to the United Kingdom’s Brexit vote and now Trump’s election in the United States, and the potential for protectionist and anti-free-trade policies are headwinds to export-driven emerging markets such as China, Korea, Taiwan, and Mexico. On the other hand, emerging market countries with strong domestic, consumer-driven economies such as India are relatively better positioned.
In the United States, the potential for economic stimulus in the form of infrastructure spending and tax cuts should support economic growth. While the prospects of a stronger U.S. economy should be broadly positive for emerging markets, the concern at the moment is that a stronger economy may result in higher inflation, rising U.S. bond yields, and a stronger U.S. dollar, all of which are headwinds for emerging market exchange rates, fund flows, and ultimately economic activity.
Meanwhile, economic activity and the macroeconomic outlook for China are improving. After concerns early in 2016 that the Chinese economy was heading for an abrupt slowdown, recent data and industrial profit are showing clear signs of improvement, indicating that China has successfully stabilized its economy—notably its heavy industry. Furthermore, indicators such as auto sales, commercial vehicles, rail tonnage, and power consumption all point to stabilization.
We expect relatively stable Chinese growth next year, in the 6% to 7% range, and the transition of the economy from one that is led by fixed- asset investments to one led by consumption to continue. Consumption now accounts for 85% of incremental gross domestic product (GDP) growth.
Given the complex geopolitical and economic implications for emerging markets, we are revisiting our emerging market exposure in light of the elevated risk profile post-election.
GICS Reclassification: Impact on Emerging Market Investors
