The sell-off in many emerging markets after the US election is starting to correct as the protectionist rhetoric of president-elect Donald Trump softens. According to big US manager Brandywine Global Investment Management, there is unlikely to be a crisis because of Trump.
Brandywine, a Legg Mason affiliate manager, has studied the ‘Trump effect’ from a fixed income and currency perspective in emerging markets and is relaxed about the prospects for investors.
Richard Lawrence, a senior v.p. in portfolio management at Brandywine, said last week that the emerging markets sell-off post election was a “knee-jerk reaction” which was showing signs of dissipating. Like many aspects of the Trump campaign, the president-elect’s strident views are being tempered by post-election reality.
In a client note, Lawrence said there were significant differences between emerging markets in the past relative to where they were today.
He said: “Compared to the late 1990s, we have seen a massive buildup of foreign-exchange reserves into the trillions [of dollars], which has given emerging markets the ability to defend their currencies.
“Prior emerging market crises were exacerbated by fixed currency regimes, where these currencies were pegged to the US dollar rather than floating rates. The fact that most emerging market currencies are free floating these days means they can act as the shock absorber by going through the depreciation process. In effect, that is what happened at the end of the commodity cycle from 2011 through the start of this year. Emerging market currency valuations adjusted lower, acting as the shock absorbers.”
“Our view on the dollar is that there is potential for it to appreciate by 5-10 per cent from here. Oftentimes, when investors talk about dollar appreciation they tend to think about the dollar spot index…
“When Brandywine Global thinks about the dollar and its potential to appreciate or depreciate, we tend to do that on a more trade-weighted basis. In our view, the dollar could continue to appreciate against some of the majors but perhaps not as much against some emerging market currencies, which we believe are already mispriced against the dollar.”
With respect to Mexico, which has been at the epicenter of the post-election sell-off, Lawrence said: “If you listened to candidate Trump during his campaign, you would think that the North American Trade Agreement was a unilateral deal with an endless supply of Mexican goods coming into the US, but that is not true.
“The U.S. exported $230 billion of goods to Mexico last year and it still remains the number one or number two export market across 21 states.
“We have already seen some of president-elect Trump’s rhetoric on Mexico soften and think this will continue. We believe the whole discussion around Mexico may be instead focused on security. Does that mean a wall is going to get built? I think the wall is a metaphor for greater border security.
“Our view is that candidate Trump took a very hard line on a number of different issues and he is now walking them back, as he may also do regarding his initial position on trade. We are waiting for information on his actual policies once in office rather than taking campaign promises at face value, which is why we have not made any significant adjustments to our emerging market positions.”