During October, the strategy outperformed the MSCI Emerging Markets index by 2%.
The performance was partly a reversal of month-end relative moves from September but was helped by the portfolio underweight in India as well as a good performance from Mexico, Brazil and Taiwan.
We have remained active and cautiously positive in China where hope and disappointment continue to alternate as investors hold their breath on potential stimulus moves. We have also been adding to markets like UAE and Indonesia that should be relatively immune to a Trump presidency while reducing Korean exposure.
With the US election now out of the way, we are now watching for smoke signals from the incoming administration. While the broad ambitions have been well telegraphed – tariffs, tax cuts and deportations – the implementation and timing remains to be seen. Given the stronger mandate and more experience compared to the first term, there may be more of a translation of intent into actions.
It is clear that decoupling from China will be an ever greater policy goal for the US. In recent years, China has been clumsy diplomatically and failed to make friends who could replace the US as a trade partner. This means it will need to find a new growth model internally to replace the export led one. It may be pushed into long needed structural reforms and bolder domestic stimulus moves than the leadership has been willing to entertain so far.
Countries like Mexico, Taiwan and Korea could conceivably benefit through replacing Chinese exports that cannot possibly be produced in the US in the coming years. At the same time they are also at risk from tariffs and a decline in US consumption resulting from inflationary pressure and impacts of other policies.
Markets that are less dependent on exports of manufactured goods are more likely to be affected by knock on effects of Fed policy via their currencies. These include Brazil, South Africa and Indonesia where central banks may need to step in. Finally there are likely safe havens like the UAE with currencies tied to the dollar and strong domestic drivers. The key risk factor would remain potential pressure on the oil price from increased US supply, however we are not convinced of the ability and willingness of US shale producers to greatly increase production at current or lower prices.
Overall, it is hard to sugarcoat a Trump presidency as a net positive for Emerging Markets in the short term. As always, however, there will be significant differences and dynamics between countries and sectors. The uncertainty is likely to provide opportunities for picking good stocks.
