Bakkum pointed out international trade hasn’t grown materially in the past couple of years, and has actually edged down towards virtually zero this year, while the ‘growth differential’ between developed and emerging markets has decreased quite consistently since 2009.
“People buy emerging markets because of the stronger growth prospects. But Trump’s election is not going to spur growth in EM,” said Bakkum.
Wait-and-see
The growth differential between EM and DM may have narrowed in recent years, the valuation gap has widened following the EM Trump slump. Already expensive US equities have become more pricy, while emerging market stocks are now a lot cheaper than a week ago.
So many fund selectors who have stocked up on emerging market assets this year aren’t throwing in the towel just yet.
“We haven’t changed our EM exposure after Trump got elected. We are waiting for the first steps of the new Trump administration before taking a decision,” Alvaro Martin Sauto, head of funds of funds at Bankia in Madrid, told Expert Investor, highlighting the uncertainty that surrounds Trump’s presidential agenda. “We also think the EM markets have overreacted to the outcome of the US elections specially the currencies.”
That indeed seems to be the case with the Mexican peso, which has lost about 11% of its value against the dollar since the US presidential election, believes Bakkum. But only time will tell whether the markets have been discounting the effects of Trumpian rule correctly. There are risks to the downside as well as the upside.
But one thing looks certain: under a Trump presidency, global trade is not going to accelerate, and that will likely be a burden for EM assets, and the global economy in general.
