What the US elections could mean for EM investments

What the US elections could mean for EM investments

Big investors may be reluctant to publicly comment on their predictions for Tuesday’s poll, but the prevailing view is that a Joe Biden win would be good for most developing countries and offer opportunities that are not yet priced in.

“Emerging markets will do better with a Biden presidency,” said Charles Robertson, chief economist at Renaissance Capital, an EM investment bank.

He argued that the stock and bond markets had not yet considered this possibility and that big investors were still concerned for not anticipating Donald Trump’s victory in 2016.

“I don’t think anyone is really ready to bet in a big way. The shock of 2016 was so significant that people are not positioning themselves massively for it because they just don’t trust the polls, ”said Robertson. “I think we’ll see a lot of money allocated to the EMs across the board,” he said in the event of a Biden win.

Both morning equity and bond funds have seen net outflows of $ 25.8 billion and $ 9.2 billion, respectively, this year. This comes from Morningstar data, which covers both passive and active investment vehicles, though sales were mainly driven by a switch in risk-weighted assets related to the coronavirus pandemic.

I’m not sure if Russia is the place to go if Biden wins or Turkey. Countries with aggressive rhetoric and actions will not be tolerated

While other factors have had an impact, it is believed that EM markets would have fared better without Trump. Timothy Ash, an analyst at BlueBay Asset Management, argued that the Trump presidency “was not good for global trade growth” because of his administration’s protectionist stance.

“EM is a proxy for global growth and a Biden win means more global growth and trade,” he added.

In the past, the valuation of emerging market assets was often determined by the strength of the US dollar. When the greenback is weak, investors typically pull money out of the US and invest it in areas like emerging markets, where the returns on local currency stocks and US dollar bonds look better. When the dollar is strong, this trend works in reverse.

Gary Greenberg, head of emerging markets at Federated Hermes, said a blue wave – a clean sweep of the Presidency, House of Representatives, and Senate – would result in a bigger federal stimulus package than a Trump presidency would deliver.

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Not only would this result in a weaker dollar, but stronger US growth as well. That would be another plus for emerging markets, especially base metal exporters like Peru, South Africa and Indonesia, as well as cyclical economies like Chile, South Korea and Mexico, of which Hermes had strengthened its positions in several countries.

“With a blue wave, global trust will build. US policy is becoming more predictable and rational, ”Greenberg added.

According to Robertson, a weaker dollar caused by Biden would allow developing country central banks to keep interest rates low and support growth. In the meantime, more predictable trade policies should give companies more confidence to invest in emerging markets.

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However, Robertson also said that a blue wave could create such a huge fiscal stimulus that investors may “want to be in the US for the growth story” and possibly pull money out of emerging markets.

Even if the emerging markets retain their appeal, the impact of a Biden win is likely to differ between countries.

“I’m not sure if Russia is the right place if Biden wins, or Turkey. Countries with aggressive rhetoric and actions will not be tolerated, ”said Greenberg with the potentially greatest impact on the Russian stock market, given that foreign investors have had oversized exposure to Moscow for some time.

“It’s easy to go through the list of authoritarian states and see them all as losers: Russia, Saudi Arabia, Turkey, Brazil,” said Ash.

He argued that Turkey had an “unfinished deal with Biden” who was vice president during an attempted coup against President Recep Tayyip Erdogan in 2016, which many Turks believe was backed by the Obama administration.

Even so, he suggested that a President Biden would “try to reset Turkey” as it is important as a potential strategic partner and wants to focus on Moscow instead.

There won’t be much slacking off with China. Theft of intellectual property is the central issue

“Russia is a strategic enemy of the US, Turkey is not, it is a long-term ally,” said Ash, adding that Russia poses a greater threat than China as it undermines Western democracy.

However, Beijing’s relationship with Washington will be by far the most important for passive EM stock investors. Including Chinese stocks listed in Hong Kong and the US, the country now accounts for a record 42.6 percent of the widely used MSCI EM index, while Russia weighs 2.6 percent and Turkey just 0.3 percent.

And China is believed to remain in Washington’s crosshairs, whoever occupies the White House.

Mr Ash said that although a Biden administration would be more likely to seek multilateral support for its stance on China than if Trump stayed in power, he added, “There won’t be much slacking off with China. Theft of intellectual property is the central issue. ”