In a recent Investor Daily webcast, Aberdeen Standard Investments (ASI) global head of emerging market equities Devan Kaloo explained how political risks have shifted away from emerging markets and toward developed economies like the US and the UK.
“For most of the emerging market economies you have reformist governments and orthodox economic policies being pursued by these governments,” Mr Kaloo said. “Whereas, in contrast, you are getting a significant change in developed markets.
“In developed markets today, you have the rise of populism. In my opinion, populism is about the rise or the increase of state intervention. That is a marked change when we are talking about developed economies because, over the last 30 years, we have seen the decline in state intervention, the rollback of government and the rise of private enterprise.”
The difference today, Mr Kaloo said, is that it is has become socially acceptable for governments to intervene. The rise of protectionism and the US-China trade war is the biggest example of this. But there are others. Redistribution policies and increasing regulation are on the rise.
“It has now become socially acceptable to put in place protectionism,” Mr Kaloo said. “That’s what the US-China trade war is all about. What that means is if you are a large economy with a large domestic market, you can start saying to manufacturers, ‘if you want to supply here then you have to manufacture here’. So suddenly there is the ability for countries like India and Brazil to say you really need to manufacture here if you want to supply here, and again that has a beneficial impact for these underlying countries.
“Historically, when people have invested in emerging markets, they have favoured the more open trading economies of Korea and Taiwan. Going forward, the large domestic economies like India and Indonesia will be in a better position to protect their interests and actually benefit from the US-China risk by shifting supply chains.”
Mr Kaloo said companies are already starting to shift manufacturing away from China and into countries like Vietnam, Thailand, Indonesia and Mexico. As a result, emerging market equities now have the potential to act as a defensive against the rising political risk of the US-China trade dispute.
“None of these countries are unaware of this,” Mr Kaloo said. “You have places like Indonesia and Thailand that are effectively rolling out the welcome mat and saying ‘if you want to reduce your US-China risk, why don’t you come and manufacture here’.”