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Look beyond the surface

July 2018

By Brett Diment - Head of Global Emerging Market Debt, Aberdeen Standard Investments

July 04, 2018 | 09:30 | Dubai – Over the years many people have remarked to me that there is never a dull moment in emerging markets. Never were that more true than now.

Already this year we’ve had US and China (amongst others!) squaring off over trade, a controversial election in Turkey and the departure of South Africa’s embattled President Zuma. All of this can cause alarm but it always pays to scratch beneath the surface to get a sense of the outlook for emerging markets.

President Trump’s anti-free trade stance is a case in point. It looks like the first skirmishes in a trade war that certainly poses a significant risk to the global economy.

In many ways the alarm is a natural reaction. After all, the last 30 years have been largely defined by a mantra, led by the US, of removing barriers to trade globally. This has led to unparalleled growth and development that has benefited most countries, not least emerging markets.

China’s economic might and thirst for resources from other countries makes it a bellwether for the wider emerging markets. If China sneezes, the wider emerging market universe does not necessarily catch a cold but it certainly takes fright. Emerging markets more broadly benefited significantly from low trade barriers.

So such an apparently brazen affront to global trade such as tariffs might be concerning.

But these conclusions require greater scrutiny. Firstly, so far, the face-off between the US and China has been very measured. The Trump administration is trying to rebalance the economic relationship with China, particularly the perceived unbalanced bilateral trade relationship. China knows this and its response has been measured.

The risk of escalation is there, and it would certainly damage global growth and emerging markets if the US does pursue some of what it has said it plans to. But both parties fundamentally know how much is at stake.

Secondly, China is not a story defined solely by its relationship with the US. Domestic demand is going to be a significant engine for growth in the Chinese economy in the years to come. The huge thirst for resources that comes with this growing demand is going to mean China is a vital pillar of the world economy in the years to come, regardless of the nature of its trading relationship with the US.

Thirdly, there is a real need to separate words and deeds when it comes to the Trump administration. A pattern is emerging whereby the policies that the US ends up enacting are significantly less extreme than what is initially announced.

We have seen this in relation to Mexico. It has fared pretty badly in recent years. US talk of repatriating industry and concerns about NAFTA have compounded domestic political problems challenges that have weighed on the currency and growth. Given the economy’s reliance on that of the US, this has led many to be pretty downbeat on the country’s prospects.

Mexico’s trading relationship with the US probably will change, even if the reality is less dramatic than the rhetoric, and its new President has his own challenges matching what he has promised with what he can deliver. Social and economic progress is proving harder and more faltering than during the commodities boom years.

It is a challenge familiar to other emerging markets like Brazil. It has suffered a torrid period of recession, protest and the exposure of endemic corruption.

But the country is now emerging from that period with economic growth returning and inflation improving.

The fortunes of other major emerging markets are looking similarly positive. In India, the currency has been weak but inflation is improving and the wide-ranging reform programme of President Modi will have incremental benefits for years to come.

Taken as a whole, the major economic engines of emerging markets are ticking along.  Politics will always be a feature for emerging markets. But politics and economics are inseparable in most countries, not just emerging ones. The key is to separate words from reality.

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