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Emerging markets: Trump impact will vary by region
Global Income Team
Boston - In a January blog post, we shared our views on the emerging market risk factors that are likely to be performance drivers in 2017. Now, we'll outline our thoughts on how countries and regions may fare in 2017, especially in light of an unpredictable landscape and new policies from the Trump administration.
Latin America - The tight linkages of Mexico and Central America with the U.S. could be at risk, especially Mexico's manufacturing sector. Mexico's modest current account deficit is particularly vulnerable given ongoing reliance on portfolio flows, heavy foreign involvement in its debt markets, and the potential of a Trump withdrawal from NAFTA. Central banks in Latin America may be forced to delay easing cycles if currency depreciation accelerates.
Asia - The expected stronger U.S. growth, continued/accelerated rate hikes by the U.S. Federal Reserve, and strong dollar may cause volatility in Asia. If the Trump administration follows through with tariffs, the Asian manufacturing economies could be hurt across the board.
Middle East - The Trump presidency will likely be a shock to the region, as policies could further strain currencies in the region that are pegged to the U.S. dollar. Such policies could include accelerated Fed hikes, a stronger dollar, and downward pressure on oil prices and promotion of shale oil (possibly from a new U.S. energy policy focused on deregulation).
Central and Eastern Europe - The U.S. is not a significant destination for European exports, so potential trade protectionist policies will have limited direct impact. The Trump administration could put fiscal pressure on Europeans to spend more on defense. Countries in Russia's "near abroad" may experience less support from the U.S. after an American rapprochement with Russia. They might be best viewed as collateral damage.
Trump's victory may serve to inspire and strengthen populist political challengers in the Eurozone. This, coupled with a potentially increased American skepticism toward the euro, would place higher burdens on the common currency project already weakened by years of crises and low growth.
Africa - Discussion of Africa during the campaign was non-existent. Two major U.S. initiatives in Africa are the African Growth and Opportunity Act (AGOA) and the Power Africa initiative, which we expect Trump to support due to associated benefits for U.S. companies. Even if AGOA is reversed, trade volume is negligible and most goods for low income countries already receive preferential trade access. An isolationist stance by the U.S. could push Africa towards China and Russia in the growing East vs. West tug-of-war for influence.
Bottom line: The Trump administration will likely have distinct and varied impacts on regions throughout emerging markets. Investors will be best served by thorough due diligence and flexible thinking as we expect the new administration to remain unpredictable.
Investments in foreign instruments or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical or other conditions. In emerging countries, these risks may be more significant. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer's ability to make principal and interest payments.