Geopolitics are often an important consideration when investing in emerging market (EM) stocks, the upcoming U.S. election included. But regardless of who takes the White House in November, the next administration is likely to continue down a path of deglobalization, with important considerations for EM investors, says Emerging Market Equity Portfolio Manager Daniel Graña.
Regardless of the U.S. election outcome, either presidential candidate would likely continue down a path of trade reform and deglobalization.
Against this backdrop, a rising tide will not lift all boats in emerging markets. To succeed, we believe companies must adapt supply chains and governments must focus on policy reform and investing in competitive intellectual property.
To the extent the election improves the economic outlook for the U.S., that could be a positive for emerging markets. However, the benefit would be tempered if higher taxes, stringent regulation and surging national debt hinder growth.
The 2020 U.S. presidential election has some echoes from the 2016 U.S. election in the sense that markets hate uncertainty. In 2016, we had a very unpredictable candidate Trump who was going to run for office and made lots and lots of promises and threats. This time around, Trump is a little bit more of a known quantity. But let us not forget that an important part of the emerging markets story is the ability to export their way to economic development. And I would suspect that a second term of Trump would continue down the path of renegotiating or ripping apart trade agreements.
Prospect of a Biden Presidency on China
I think Biden if elected would be tougher on China than perhaps President Bill Clinton was when President Clinton negotiated the WTO (World Trade Organization) ascension with China. But I suspect that the progressive wing of the Democratic Party would certainly keep the pressure on to focus on the blue-collar workers that have lost out from trade. I think even President Biden, if he were elected, would feel the pressure to talk tough on trade with China.
U.S. and China trade decoupling
I think perhaps the nuance is a President Biden would be more multilateralist, whereas President Trump is a unilateralist. What does that mean? Biden would be more willing to work with allies and because he would be spending more time with allies, there would be fewer fireworks, it would be a slower process. But I think the die is cast. I think the U.S. and China, whether it is fast speed under Trump or slow speed under Biden, are in the process of some version of trade decoupling, reversal of globalization or reversal of everything we have accomplished in the WTO.
Diversification of supply chains
While we can not say for sure what is going to happen in the future in terms of trade agreements, what I can say is that the likelihood is a lot of companies are going to have to diversify their supply chains. I think it would be irresponsible of them to continue having a disproportionate share of the supply chain based in China. I think there are some EM companies that will benefit. In some cases, they will be able to supply the Chinese companies that are in the process of localizing or moving away from U.S. supply companies. I think it’s a mixed picture.
Importance of country analysis
The top-down analysis has always been important in emerging markets. Choosing the right countries – this is an asset class that has seen sovereign debt crises, currency crises, banking crises – the choices that countries make, the choices that companies make, too, have disproportionate effects because the institutional guardrails are not there. We are emerging and if we are moving to a world of deglobalization, where you have to choose a side, it’s necessarily a more difficult, more complicated environment. Some countries are going to do better because they have reformist governments or they have the right technology, the right amount of intellectual property has been created; or some other countries will not do as well.
To the extent that the U.S. election produces change that improves the economic outlook for the United States – so, let us say we finally address the poor infrastructure that we have in this country – to that extent that you raise the potential GDP (gross domestic product) growth rate of the United States, that is a very good thing. However, to the extent that much higher taxes and much higher regulation does not follow with improvement and efficiency and improvement in the debt trajectory of the country, then those kinds of policies will tend to slow the U.S. economy and those kinds of policies will also potentially have a negative collateral effect on U.S. equity markets. EM markets can outperform when U.S. equity markets struggle, but that has not been a usual situation.
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