Trump factor will determine how emerging markets perform in 2017

Emerging markets can be good investment opportunities next year, but ultimately, that will be dependent on U.S. politics.

Analysts have told CNBC they foresee an improvement in emerging markets in 2017, citing stronger growth in some of the countries, relative political stability and positive company earnings. However, the election of Donald Trump and the expectation that the U.S. will adopt a more protectionist approach pose real risks.

“We still see improvements in the underlying growth of emerging markets, supporting greater optimism than we’ve seen in years. However, should any of the president elect’s EM (Emerging Market)-unfriendly campaign proposals make their way onto the policy agenda, sentiment around emerging markets would certainly suffer.” Emily Whiting, client portfolio manager for the emerging markets at JPMorgan, told CNBC via email.

Emerging market stocks and currencies saw an immediate sell-off after the election of Donald Trump.

Investors believed that Trump’s policies to end trade deals and impose tariffs on China would negatively affect emerging markets.

But his pro-investment agenda has raised expectations of higher interest rates and a stronger dollar, which have offset the impact of big losses for the emerging markets.

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Argentina, Ukraine, Brazil, Indonesia and Serbia should be attractive bond markets for government debt, according to Morgan Stanley.

In the case of Brazil, high yields, low growth and falling inflation prospects should make rates attractive for investors. Private Investor Schroders have also said Brazil is a good opportunity for both bonds and equities.

“Unless we get a significant amount of volatility predicated upon a much strong dollar, a much stronger reflationary trade impulse, (Brazil) should be able to continue to cut rates,” James Barrineau, co-head of emerging markets debt relative at Schroders said, in a note.

Optimism that Brazil will move rates lower also support equities. Nicholas Field, global emerging market equity strategist at Schroders added that growth prospects in Brazil and Russia make them attractive for equities.

“You have two economies which have been shrinking at a rate of around 2.5 percent per annum…the likelihood is that they return to modest growth next year,” he said.

Even though growth is expected to be modest, it “can drive quite a lot of recovery in domestic equity earnings, supported by interest rates cuts as well,” he added.

The reform agenda of President Joko Widodo in Indonesia makes the country one of the strongest-performing emerging markets, said Credit Suisse.

Tourists swimming in the pool at the Kremlin Palace Hotel in Antalya, Turkey in front of an exact replica of the Moscow History Museum.

Mustafa Ozer | AFP | Getty Images
Tourists swimming in the pool at the Kremlin Palace Hotel in Antalya, Turkey in front of an exact replica of the Moscow History Museum.

Russia should also be under the radar for investors. Expectations that oil prices will stabilize throughout 2017, that inflation will go down and a more-friendly rhetoric from the U.S. should boost Russia’s economic growth.

Chinese equities should be an attractive opportunity, mainly technology and insurance stocks. According to Credit Suisse, this is because there will be a recovery in earnings, valuations are attractive and liquidity should be buoyant.

However, all of this will be volatile to Trump’s presidency.

“The threat of rising U.S. protectionism remains significant,” Fathom consulting said in a research note.

“Countries that are already economically vulnerable would suffer the most severe negative shock from a protectionist Trump presidency. Broadly speaking, that means countries with large current account or fiscal deficits, (Brazil, South Africa and Turkey), high external outstanding debt (Turkey) and significant trade links with the U.S. (Malaysia, Mexico and Vietnam),” the consulting agency added.

Morgan Stanley added that in the “medium-to-longer-term, the impact will largely be felt via the trade channel depending on to what extent restrictive trade policies are implemented.”

“The direct impact would be felt via a decline in exports from EM to US,” the bank said.

Trump’s policy agenda could also lead the U.S. Federal Reserve to increase rates at a faster pace, which could impact currencies in the EM world.

“EM currencies would depreciate steadily over the next two years as U.S. interest rates rose faster than market pricing suggested. This process, hastened by the U.S. election, has happened more rapidly than we had anticipated and probably still has further to go,” Fanthom added.

The true “Trump impact” on the EM world will only be clearer once the president-elect takes office.

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