Trump will to tax foreign imports, a crucial factor for EM

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InvestmentEurope has canvassed views of fund managers and selectors on emerging markets investments in light of the policies emerging from the Trump administration.

Investors have come back on the emerging markets segment last Summer but deserted it again right after the election of Donald Trump and because of the forthcoming implementation of protectionist measures by the US.

The move was stressed by Gabriel Catherin (pictured), portfolio manager of the KBL Key Fund-Global Emerging fund of funds and head of Competence Center Multi-Management of Richelieu Investment Funds at Luxembourg-based KBL European Private Bankers.

“A number of countries in emerging and frontier markets remain exposed to policies and economic moves from the US because they hold some debt issued in dollars. In addition, these markets are much driven by flows that come and go. When investors are afraid, flows become more important and there are not a lot of countries in which local investors have enough weight to neutralise outflows of foreign investors,” Catherin says to InvestmentEurope.

For the EM FoF manager, Mexico is in first line if the US decides to withdraw themselves from regional trade agreements with LatAm markets, regarding the important trade relationship established between the two countries.

Catherin adds the question is how much Trump’s willingness to tax imports from foreign countries can be effective.

“The situation is similar with China : iPhone components are produced and assembled in China but the US do not have the ability to establish this kind of factories on their ground. Trump’s administration has entered a game of liar’s poker. Let’s recall that China holds a massive amount of US Treasuries and selling them would be a way to destabilise the US. The realisation of Trump intentions is however not easy to implement.

“And even if Trump’s administration can still draw back cars factories of American firms based in Mexico, some components are still coming from Brazil or Chile for instance,” the fund selector argues.

No hard-landing risk so far in China

About China, Catherin assesses the hard-landing risk expected by many last year has never really existed for the moment. He observes that investors have always had a negative stance on China.

“They focus on China’s GDP growth but they forget that China is the second global economic power worldwide with a 6.5% GDP growth. Investors might not perceive the wealth generated in China. Chinese debt has increased but it is held by the government.

“As long as the government can afford to fulfill deficits resulting from Chinese debt, there is no risk of hard-landing. When you look at Chinese banks, we can suspect all reserves being built will aim of financing future bad loans. Banks will not provide returns but will cover their future deficits. China is in transition. Other sectors than banks such as healthcare and e-commerce develop at a high pace,” the portfolio manager of the KBL Key Fund – Global Emerging FoF develops.

Commodities exporters have been described within the emerging market universe as potential winners this year. Catherin acknowledges the recent rally seen on the asset class but he says he is not really confident on oil exporters as he believes the US will relaunch their production.

“Brent barrel’s price will stabilise around $50-$60 and we do not foresee another oil rally that will increase oil prices to high levels we have reached in the past. Also we shall monitor Iran’s plans in oil production.

“Regarding other commodities, China’s new five-year economic plan unveiled last year has broadly driven prices upwards. India has currently a number of infrastructure plans in stand-by as well. Demand is rising in commodities, EM commodities’ exporters could do well,” he adds.

Almost fully active FoF

The KBL epb’s EM FoF manager is almost fully invested in active emerging market funds.

“Active managers can still achieve alpha in emerging markets because emerging markets are not yet mature enough. Another reason is that large investment players and managers implementing computer-driven strategies remain a bit away of emerging markets. The more mature, automatised and efficient the market is, the more difficult it is to catch alpha,” Catherin says.

Passive vehicles are used to play a specific EM country where there are not enough active managers. Korea, which is a country most active managers picked in the FoF are underweight on, is an example. Catherin therefore has wanted to reduce the bias on Korea for risk management purposes therefore included a tracker in the portfolio.

The allocation of KBL Key Fund – Global Emerging follows more or less that of the MSCI Emerging Markets index.

Asia represents more than half of the fund followed by LatAm and Eastern Europe in terms of regional allocation. The FoF invests in global emerging markets and regional funds in addition to a few funds focused on Brics.

“Our emerging markets’ fund selection combines expertise of large managers and boutiques. We hold strategies from TT Investment Management, Gemway Assets, Kotak or Polunin alongside these of large players such as First State and Invesco,” Catherin highlights.

Russia increase

In the KBL Key Fund – Global Emerging fund, Eastern Europe’s exposure remains low, around 7%.

Catherin explains that the team keeps a neutral stance towards the region with a slightly more positive view on Russia than on Turkey and Poland.

“We have increased the FoF exposure to Russia. On the one hand, Russia is pulling out of recession and shows positive GDP growth again. Russian companies have cleared their balance sheets. Sanctions imposed to Russia have benefited to local companies in the end.

“For instance, Europe has penalised Russia on agriculture hence the country has now become almost independent in its agriculture. We can expect the US to withdraw their sanctions towards Russia and if it occurs that will act as a catalyst for foreign investors who will likely go back,” he concludes.