Good-bye America, hello Asia: MAIKE CURRIE on why China and India are now the bright spots for investors
Mention emerging markets and the talk inevitably turns to Trump.
This is because, for better or for worse, the fortunes of the world’s developing economies are closely linked to the outlook for the world’s largest economy – America.
The two main reasons for this are trade and tapering.
Concerns: Trump’s tirade on global free trade could hurt emerging countries
Let’s start with trade – many emerging markets are export driven economies which have built their fortunes by supplying the huge appetite of the American consumer.
Concerns are that Trump’s tirade on global free trade, fronted by his ‘America first’ mantra could hurt these countries.
Then there’s tapering. In the era of ultra-loose monetary policy, decent returns have been in short supply, this has meant a gush of money flowing into emerging markets as investors chased the higher returns on offer here. But times are changing.
With the US central bank hinting at three interest rate hikes in 2017, money will revert back to the US. Rising rates also mean a stronger dollar – bad news for those countries that have racked up trillions of dollars in foreign currency debts.
By now you’re probably thinking it’s worth steering clear of emerging markets altogether. But that would be a mistake. Emerging markets are on increasingly divergent paths and for the long term investor it will pay to differentiate.
Here are three things to consider if you’re looking to up the growth potential of your investment portfolio:
1. Asia: the new political safe haven?
In 2016 some of the strongest performing markets in the world were emerging markets thanks largely to a recovery in commodity prices and the ongoing search for decent returns.
This rising tide seems to have lifted a lot of boats and some markets like Brazil look to have run ahead of themselves.
But there are regions which still look like good value and here Asia stands out. Investors tend to underweight the region and attach a huge discount relative to developed markets due to political uncertainty.
Some markets like Brazil look to have run ahead of themselves
But given the political clouds hanging over the developed world (think Trump, Brexit, European elections and even a second Scottish Referendum) many question whether such a discount is still justified.
We like to think of the investment world as neatly split between ‘safe’ developed markets and ‘risky’ emerging markets – but perhaps it is time to rethink this. If anything, Asia is increasingly looking like a political safe haven, making good progress in promoting a more stable economic and political backdrop.
This is particularly evident in China and India – the region’s largest and most important economies. Funds like the Henderson Emerging Markets Fund, which looks to invest in quality companies in these regions, are a good way to tap into this.
2. All eyes on India
While many developing economies are creaking under the burden of an aging population, and China is likely to pay a long-term price for its now abandoned one-child policy, India’s demographics is its biggest trump card.
Roughly half of the country’s population of 1.25billion is under 25 years old. Its people are entrepreneurial and the country boasts a strong education system.
Looking good: Roughly half of India’s population of 1.25billion is under 25 years old
Nick Price, manager of the Fidelity Emerging Markets Fund says India is the ‘stand-out’ emerging market. He points to the attractiveness of the country’s consumer sector, driven by the growing wages of over 1 billion people.
Bold reforms by India’s Prime Minister Narendra Modi, coupled with job creation are the key to unlocking India’s demographic advantage and fast tracking growth. There have been some bumps along the way – like the withdrawal of high value bank notes at the end of last year, but these are exactly the type of bold steps needed to formalise the country’s shadow economy and increase the tax base which in turn can be spent on India’s decrepit infrastructure.
Finally, remember that unlike many other emerging markets, India imports more than 80 per cent of its oil which means the falling oil price is good news for this economy.
3. China trumps Trump
A lot has been written about Donald Trump’s ‘reflation’ trade – the idea that the US president’s expansionary policies of tax cuts and infrastructure spend will kick start growth.
But Trump’s proposed spending of up to $1trillion over a decade to make America’s infrastructure ‘second to none’ pales into insignificance when compared to China. In fact, China spent more than that on roads, railways, bridges and telecom networks last year alone.
Of course China’s so-called ‘building binge’ has not always been a good thing with bridges to nowhere, empty apartment blocks and deserted industrial parks.
Thankfully, China is rapidly moving to a consumer-driven economy with the rise of its middle class expected to drive growth in sectors like travel and tourism, healthcare and financial services.
China spent more than $1tr on roads, railways, bridges and telecom networks last year alone
President Trump’s ‘Buy American and hire American’ rhetoric has also raised concerns over China’s vulnerability to American protectionism. But as Mark Williams of the Liontrust Asia Income Fund points out, while Trump’s unpredictability may lead to some volatility, it is unlikely to cause a trade war with China.
There are three reasons for this:
One: if Trump imposes China specific tariffs, most jobs lost in China will go to countries other than the US – like Vietnam, where many Chinese companies have already relocated given lower production costs.
Two: broader import duties will be inflationary, pushing up costs for US consumers – for example estimates are that making and assembling the components of an iPhone in the US will push up costs by up to $90, according to IHS Markit.
Finally, if China retaliates by placing tariffs on its biggest imports across the Pacific, namely planes, helicopters, spacecraft, cars and soy beans, this will hurt big business in the US, hurting companies like Boeing and General Motors.
As for an embargo on soy beans (US-China trade accounts for 25 per cent of the world market) expect job losses in agricultural workforces in Mississippi, Arkansas, Ohio and Missouri – the very communities supportive of Trump.
As Williams puts it: ‘Protectionist measures against China are unlikely to significantly increase manufacturing jobs…it will hurt American corporates and it will hurt American consumers.’
Maike Currie is Investment Director at Fidelity International and the author of The Search for Income – an investor’s guide to income-paying investments. The views expressed are her own. @MaikeCurrie