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How Emerging Markets Perform in 2017 will be Determined by Trump Factor

How Emerging Markets Perform in 2017 will be Determined by Trump Factor
U.S. politics would significantly decide on whether the emerging markets can be good investment opportunities next year.
Citing stronger growth in some of the countries, relative political stability and positive company earnings, analysts have said they foresee an improvement in emerging markets in 2017. However, real risks are posed by the expectation that the U.S. will adopt a more protectionist approach by President elect Donald Trump.
"We still see improvements in the underlying growth of emerging markets, supporting greater optimism than we've seen in years. However, should any of the president elect's EM (Emerging Market)-unfriendly campaign proposals make their way onto the policy agenda, sentiment around emerging markets would certainly suffer." Emily Whiting, client portfolio manager for the emerging markets at JPMorgan, told the media.
After the election of Donald Trump, there was n immediate fall in the emerging market stocks and currencies. Investors believed that emerging markets would be negatively affected by Trump's policies to end trade deals and impose tariffs on China.
But the impact of big losses for the emerging markets have been offset his pro-investment agenda has raised expectations of higher interest rates and a stronger dollar.
According to Morgan Stanley, Argentina, Ukraine, Brazil, Indonesia and Serbia should be attractive bond markets for government debt.
Investors would be attracted by high yields, low growth and falling inflation prospects of Brazil. Brazil is a good opportunity for both bonds and equities, private Investor Schroders have also said.
"Unless we get a significant amount of volatility predicated upon a much strong dollar, a much stronger reflationary trade impulse, (Brazil) should be able to continue to cut rates," James Barrineau, co-head of emerging markets debt relative at Schroders said, in a note.
Equities are also supported by optimism that Brazil will move rates lower. Growth prospects in Brazil and Russia make them attractive for equities, added Nicholas Field, global emerging market equity strategist at Schroders.
"You have two economies which have been shrinking at a rate of around 2.5 percent per annum…the likelihood is that they return to modest growth next year," he said.
He added that it "can drive quite a lot of recovery in domestic equity earnings, supported by interest rates cuts as well," even though growth is expected to be modest.
Credit Suisse said that the reform agenda of President Joko Widodo in Indonesia makes the country one of the strongest-performing emerging markets.
Under the radar for investors will also be Russia. Russia's economic growth should eb boosted by the expectations that inflation will go down and a more-friendly rhetoric from the U.S. and oil prices will stabilize throughout 2017.
Mainly technology and insurance stocks, Chinese equities should be an attractive opportunity. There will be a recovery in earnings, valuations are attractive and liquidity should be buoyant, according to Credit Suisse.
However, all of this will be volatile to Trump’s presidency.
"The threat of rising U.S. protectionism remains significant," Fathom consulting said in a research note.
"Countries that are already economically vulnerable would suffer the most severe negative shock from a protectionist Trump presidency. Broadly speaking, that means countries with large current account or fiscal deficits, (Brazil, South Africa and Turkey), high external outstanding debt (Turkey) and significant trade links with the U.S. (Malaysia, Mexico and Vietnam)," the consulting agency added.
The "medium-to-longer-term, the impact will largely be felt via the trade channel depending on to what extent restrictive trade policies are implemented," Morgan Stanley added.
"The direct impact would be felt via a decline in exports from EM to US," the bank said.

Christopher J. Mitchell

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