Emerging markets look like good value on traditional metrics, but the trade all depends on making the right bet on the outcome of Trump’s trade war with China, says Ellerston Capital.
Speaking at a Crestone Wealth roundtable event in Sydney earlier this month, Ellerston Capital’s head of global macro, Brett Gillespie, said that investors will need a “game plan” if they are making emerging market (EM) trades over the coming months.
“To get EM right for the next six months you need to get tariffs right,” Mr Ellerston said. “You need to game plan what’s going to happen to with this tariff situation.
“In terms of vulnerabilities, we’ve been talking about, in the medium term, a very big flow vulnerability in EM, particularly in the bond markets, because so much money was funelled into EM over this eight-year period with very low yields.”
Ellerston Capital has turned neutral on EM in the short-term, he added.
Emerging markets have been an attractive investment for fund managers globally, with many seeing them as cheap compared to developed markets.
But the trade tariff standoff between the United States and China is proving to be problematic for investors looking to forecast the performance of EM for the rest of the calendar year.
US President Donald Trump’s posturing on threatened tariffs of up to 25 per cent on $US200 billion worth of imports from China ends on 6 September, the deadline for companies and members of the public to submit their comments on the controversial measure.
“You can step back and go ‘what does Trump want? He’s got his mid-term elections,” Mr Gillespie said. “He wants to win as much as he can in those mid-term elections. From his perspective, he is wining by bashing China. His polls have shot up since he started bashing China.”
“What I’m hearing is the Chinese are working on a plan to come back to Trump in September and try and give him something he can use to win and to try and de-escalate.”
“We could see a breakthrough at any time where they give Trump the win he wants. If they escalate and there is no truce and Trump waits for the $200 billion, EM will be under pressure and it will lead to developing markets pressure.
“You need to get this tariff right over the next few months otherwise you will come in too early.”
AMP Capital chief economist Shane Oliver noted that, if Trump gets his way, around half of imports from China will be affected.
“Negotiations between the US and China are unlikely until after the mid-terms and a possible Trump/Xi summit in November so trade will be a continuing source of market volatility for a while yet.”