The ‘Donald Trump effect’ on Emerging Markets won’t be as grave as investor outflows would suggest, specialist asset manager Ashmore has said.
This is because president Trump’s main focus in his first term is likely to be on domestic issues, not foreign policy, according to Jan Dehn, Ashmore’s head of research.
‘The single most important lesson from modern US political history is that newly elected presidents should avoid getting bogged down in complex foreign policy issues during their first term.
‘Former presidents Carter and Bush Sr. made the mistake of getting stuck with complex foreign policy problems in countries voters could not even place on a map. It ate up their political capital, the domestic economy suffered and they were booted out after their first term.’
Another reason why Donald Trump’s rule is not likely to affect EM performance is that his domestic agenda is already so full that he will have little time for foreign policy, Dehn says.
‘He is going to overhaul the tax code, negotiate infrastructure spending with the fiscal hawks in Congress and repeal Obamacare, Dodd-Frank and climate commitments. Indeed, we may already have seen his most important foreign policy initiative: cancellation of TPP, which is actually good for China.’
The firm's head of research also added that Trump’s rise to power triggered an irrational kneejerk reaction due to his protectionist campaign rhetoric.
Dehn admitted that this hostile rhetoric (namely: tweets) is politically effective but won’t evolve into anything serious.
‘The transition from hostile rhetoric to draconian trade wars, a total repeal of NAFTA and 45% blanket tariffs on China would be bad for the US economy and would meet with serious institutional push-back.’
‘Trump is more likely to protect vulnerable and unproductive US industries, such as steel, and to use fiscal incentives to encourage US companies to relocate workers back to the US. As every trade economist knows such policies increase the cost for consumers by increasing deficits, pushing up prices (while sometimes lowering quality) and slowing the trend growth rate.’
Conversely, Ashmore thinks that the US under Trump will gradually shrink from its former economic spheres of interest abroad.
‘This creates room for others to advance and China in particular will benefit,’ Dehn says
Ashmore is focused exclusively on emerging markets and more than 90% of its client base consists of institutional investors including public and private pension funds, insurance companies and sovereign wealth funds.
The latest major client win for Ashmore was in December, when Strathclyde Pension Fund, one of the UK's largest, awarded an emerging market debt (EMD) mandate worth 1.5% of the total fund's value, or £280 million, to the asset manager.