Trump’s chaotic trade crusade is making emerging markets great again
Trump’s escalating trade war is putting sizeable, rapidly-growing nations less integrated with global trade flows at a unique advantage, says William Pesek
Another day, another US$50 billion of tariffs thrown haphazardly at the global economy. Make it US$100 billion next time, if Donald Trump’s latest threat is to be believed.
Rather than making America great again, the White House seems set on establishing an own-goal record. Trump’s chaotic and erratic swings (and misses) are slamming markets from New York to Tokyo and trolling China, the No. 2 economy, into retaliation. Ever a counterpuncher, Trump is sure to retort with yet bigger blows.
This dust-up makes the 2013 Federal Reserve “taper tantrum” look quaint. It also makes the emerging markets hit the hardest five years ago look great by comparison.
Back then, Morgan Stanley coined the phrase “Fragile Five,” a list governments were desperate to avoid. Making the cut were Brazil, India, Indonesia, South Africa and Turkey. Now, a Trump effect is taking risk dynamics full circle, at least for the Asian economies initially in Morgan Stanley’s cross hairs. Today, they’re looking more like safe havens.
Well before a reality-TV star won the US presidency, officials in Jakarta and New Delhi were raising their economic games. The turmoil of 2013 led to the 2014 elections of reformists Narendra Modi in India and Joko Widodo in Indonesia. Both, to varying degrees, strengthened national balance sheets, raised defences against market mayhem and took on vested interests.
But Trump’s escalating trade war is putting sizeable, rapidly-growing nations less integrated with global trade flows at a unique advantage. That means India and Indonesia – and, perhaps, Malaysia, the Philippines and Thailand.
Markets in Kuala Lumpur and Manila deserve clear asterisks. Shenanigans ahead of Malaysia’s election – from aggressively redrawing voting-district maps to trying to ban the main opposition party – makes it a “buyer beware” market. The same goes for Philippine President Rodrigo Duterte’s war on drugs, which is undermining Manila’s global standing. Thailand’s junta, meanwhile, is digging in for a long stay.
Still, are Japan, South Korea or other highly open, developed markets looking much better as Trump and Xi Jinping go mano-a-mano? It’s the financial equivalent of one of those Marvel “Avengers” films – other economies laid waste by battling superpowers.
Trump and Chinese President Xi exchanging blows will stop Japan’s second-longest post-war recovery in its tracks. Seoul could be excused for fearing the “America First” president 11,000 kilometres away more than it fears Kim Jong-un up North. Trump’s “fire and fury” rhetoric and itchy Twitter fingers are one thing. Him taking aim at South Korea’s trade position imperils stability. First Trump demanded the 2012 Korea-US trade agreement be renegotiated. Now he’s torturing President Moon Jae-in by not signing it.
What India, Indonesia and, depending on your comfort level, Malaysia, the Philippines and Thailand, boast is vibrant and growing middle-class consumer sectors. Those are enviable cushions as Trump swings a wrecking ball at the global trading system, the Fed tightens and China’s economy struggles to keep balance.
Investment decisions, of course, are made on a relative basis. And emerging markets are comparatively cheaper than, say, the S&P 500. The MSCI EM Index is trading at 12 times forward corporate earnings compared to 17 times in Trump’s America. That means more upside.
Emerging markets surely have their share of blemishes. India and Indonesia, for example, must accelerate efforts to reduce graft, improve infrastructure and invest more in education and health care. And there is always the risk that China’s “Minsky moment,” when a debt-fuelled boom ends badly, arrives and slams economies from Hong Kong to Brazil. In fact, Trump’s trade war could be the catalyst.
For now, though, Trump’s bombast may be doing more to highlight the strengths of developing economies than his own.
William Pesek is a Tokyo-based journalist and author. He has written for Bloomberg and Barron’s