Will Trump’s protectionism cause a trade war with emerging markets?

India-Temple-Sikh-700x450.jpg

Emerging markets are already feeling the impact of Donald Trump’s protectionist stance on Chinese and Mexican trading relationships, with major EM indexes slumping on today’s US election results.

Commentators unsurprisingly put Mexico at the forefront of upcoming uncertainties with Trump in power at the White House, with the peso already weakening. The Mexican currency plunged more than 13 per cent against the dollar today in the biggest daily move in two decades.

Architas investment director Adrian Lowcock says: “The Trump vote will be more difficult for emerging markets which are largely exporters and more dependent on the US.

“Not only Mexico, but also China will be affected, although it exports globally, not just to the US. If you put up trade barriers you increase costs for these countries. Although a weaker dollar will be better for them in the short term, it will be a temporary thing. The greater concern is what the economic impact will be on emerging markets overall.”

AJ Bell investment director Russ Mould says other big EM exporters are already showing the “fear of protectionism” coming out of the US. He notes the Taiwan and Korean main indices are currently down 3 per cent and 2.15 per cent.

He says: “I would be intrigued to see what American consumers will think of this as it would be a very complicated process on establishing new tariffs with EM countries. I am not sure it is necessary to make imports more expensive.”

Barings frontier and emerging markets investment director Michael Levy agrees with Lowcock and Mould on the “major impacts” of the Trump victory on Mexico and China, adding Russia to the mix of countries to be watched within portfolios.

Levy says Trump’s rhetoric, which culminated in talk of 45 per cent tariffs against Chinese exports as well as 35 per cent tariffs for US companies outsourcing abroad, could start “a trade war”.

He says: “The global supply chain, which is highly interconnected in the IT and automotive industries, would also suffer greatly and is already facing disruption after the Brexit vote in the UK. At this point we should note that trade policy can be changed by executive order – an intransigent Congress may not be able to intervene.

“If we do find ourselves in a trade war, Chinese authorities would likely act to stimulate demand, but the Chinese equity market, which has performed well in recent months, could become increasingly volatile.”

However, for Russia, which could be the only EM beneficiary of Trump’s presidency, Levy expects a reduction in sanctions in the coming months, which will allow Russian businesses to more easily finance themselves.

He says: “This should provide a boost to Russian companies’ prospects and may present new opportunities among Russian equities.”

Mould says as a result of the US vote, emerging markets managers might pivot from export to domestic-style stocks. He says: “EM managers will look at more domestic players and infrastructure stocks.”

Tilney Bestinvest managing director Jason Hollands claims emerging markets are more exposed to “Trump-induced downside” than US shares.

He says: “Based on Trump’s broad stance of slapping tariffs on Chinese and Mexican imports, bringing jobs back to the US and expansionary fiscal policies which might result in higher borrowing costs, the impact could well be more negative for emerging markets than the US itself where the domestic economy might be boosted by tax cuts and infrastructure investment.

“That could prove positive for shares in US domestic companies but might also see bond yields rise if the deficits widens. That might suggest that any immediate bounce in US Treasuries from panicky investors could provide an opportunity to lock in profits.”