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Cape Town - Donald Trump's surprise victory in the US presidential election is being taken remarkably well by the market, emerging markets economist Peter Attard Montalto of Nomura said on Wednesday afternoon.
He does not see major emerging market asset class outflows, but does expect much lower returns in 2017. As geopolitical risks become clearer, divergence in Eastern Europe, the Middle East and Africa (EEMEA) should become more evident, in his view.
"Broadly, we think EEMEA is somewhat removed from potential growth shocks, though South Africa especially should trade off the market’s risk and growth/infrastructure commodity linkage particularly sharply," he said.
At the same time he thinks Russia and Hungary should appear as safe havens, given their support for Donald Trump and the risk of lowering of sanctions for Russia. Montalto, however, thinks this should not be overplayed.
According to Montalto, Brexit was seen as a step change in the global order that would have a negative effect on emerging markets, whereas the Trump victory is being seen through a risk-on lens and higher growth as well as markets looking short-term to the risks of a delayed next step from the Federal Open Market Committee.
"We make no downward adjustments to our economic forecasts at this stage, but downside risks in 2017 are the key risk as uncertainty in the US economy spreads to global growth, and upside risks only develop over the longer run on uncertain implementation and effects of fiscal loosening and large-scale infrastructure building," said Montalto.
"Looking to the medium run for South Africa, we see foreign exchange and front-end rates being particularly hit with duration doing a little better. Markets are likely to focus on domestic idiosyncratic political risk more under a Trump presidency, and this means South Africa’s domestic woes will likely be seen in a worse light."
He thinks currency hedging will take the brunt of the weakness with hedge levels so low. However, this may take a while to develop as the initial reaction is positive for commodities and risk is on still.
Short-term negative impact
Herman van Papendorp (head of investment research and asset allocation) and Sanisha Packirisamy (economist) at Momentum Investments said on Wednesday they expect a short-term negative impact on emerging market asset classes in response to a rise in risk aversion.
"Although many of Mr Trump’s economic policies have not been clearly defined, the ones he has outlined suggest increased vulnerability for emerging markets as US self-interest could dominate, with the advent of anti-trade and anti-immigration policies harming emerging markets that are dependent on trade with the US," they explained.
Mark Appleton, SA strategy head at Ashburton Investments, said the surprise Trump victory has created huge amounts of uncertainty, as his policy pronouncements have often being vague and contradictory.
"Indeed, his acceptance speech already shows a marked change in tone. While at the time of writing the Republicans look set to win control of Congress, that doesn’t mean that he will necessarily be able to implement his agenda," said Appleton.
Peter Brooke, head of Old Mutual Investment Group’s MacroSolutions boutique, said a move away from globalisation and towards isolationist policies is bad for trade. It hampers global growth and he expects the world to remain trapped in limbo with low growth, low rates and low returns.
Old Mutual Investment Group chief economist Rian le Roux highlighted the short-term implications following the Trump election victory: “The rand is a high-beta currency, which means that it tends to be more sensitive to any moves against the dollar than other currencies, and this is likely to play out over the short term. But higher precious metal prices should provide some counter pressure.”
Still, Le Roux added that over the medium term the biggest risk to SA and the rand is that if US fiscal becomes notably more expansionary, it might lead to a more aggressive pace of rate hikes by the Fed. This would result in a stronger dollar, downward pressure on commodity prices and hence a weaker rand.
