With political risk a constant in emerging markets, a quiet year for institutional investors playing in the space doesn’t really exist.
“The noise can be triggered by geopolitical shifts, by social tensions or elections,” said Graham Stock emerging market senior sovereign strategist at BlueBay Asset Management, a division of RBC Global Asset Management, during a webinar on Wednesday.
Elections in particular can represent major shifts for these countries, he said, noting Mexico’s recent election of Andrés Manuel López Obrador, representing a significant shift to the left, while Brazil’s election of Jair Bolsonaro pushed the country to the right. Watching the fallout from the elections is important to investors since it takes some time to solidify what the term of a particular leader will look like. In Bolsonaro’s case, for example, the situation has been fairly orthodox from an economic policy perspective, said Stock.
Coming up, Argentina is holding an election in October. “Again, a very polarizing election: tensions between a push for more reform and engagement with the [International Monetary Fund] under the current government of [President] Mauricio Macri or a return to the populism represented by the [era of former President Cristina Elisabet Fernández de Kirchner],” said Stock.
In the meantime, the trade war between the U.S. and China is continuing to hold investor attention. It has the potential to go a number of ways, none of them especially promising for either economy, said Laurence Bensafi, deputy head of emerging markets equity at RBC Global Asset Management, also speaking during the webinar.
“While everyone loses from a protracted trade war, China likely will lose the most,” he said. “Although this view is somewhat reductive. The large trade surplus that China has with the U.S. means it will lose more mathematically. But trade and supply chains are so interlinked in this world today that we think they will ultimately lose.”
With election season just kicking off in the U.S., China may be underestimating President Donald Trump’s ability to be re-elected as there’s significant power in being the incumbent in such a race, added Bensafi.
“I don’t think this is just an economic issue. There is an idealogical war being fought as well. There is a potential for a military angle, given the South China Sea issue, and that would be the next level for this conflict to go. So, ultimately, we do think it’s not going to be positive for either economy.”
But China and the U.S. aren’t the only economies impacted by these trade skirmishes, said Stock. “In the last two weeks, we’ve seen, initially, a dramatic escalation between the relations between Mexico and the U.S., promoted again by a Trump tweet. Then almost as rapidly a deescalation toward an agreement on a deal supposedly to limit migration from Mexico to the U.S.
“Yesterday, we saw the U.S. administration complaining about monetary policy in the Eurozone, which is unprecedented, at least in the way that it was done. So there is political risk everywhere. And a lot of it is emanating from the unpredictable nature of U.S. policy.”
Environmental, social and governance considerations, both on a country and a company level, are also key when examining emerging markets, said Mayur Nallamala, head of Asian equities at RBC Global Asset Management, during the webinar. “It’s really key to our assessment and it comes from both the top down and the bottom up when we look at a company.”
In seeking opportunities, valuations are a key component, she added. And while emerging markets have been outperforming on a broad scale over the past few years, events like the trade war between the U.S. and China are disrupting that trend, she said. That, coupled with the faster than expected deleveraging process in China, has put pressure on other emerging market equities.