There is no imminent emerging market crisis ensuing under the Trump presidency, despite his hard line on a number of issues presented during the campaign, as the emerging markets are in a better position than they were a few years ago, according to Brandywine Global Investment Management.
The company’s senior vice president and portfolio management, Richard Lawrence, noted that the emerging markets were currently in a better situation due to a massive buildup of foreign exchange reserves, than compared to the late 90s, which would give them the ability to defend their currencies.
Therefore President-elect Trump’s harsh rhetoric on Mexico, which had already softened, coupled with US dollar appreciation and the emerging market selloff was rather a knee-jerk reaction to the election results than the real possibility of an emerging market crisis, Brandywine Global said.
“We are waiting for information on his actual policies once in office rather than taking campaign promises at face value, which is why we have not made any significant adjustments to our emerging market position,” Lawrence said.
He added that Trump’s stand on Mexico would continue to soften, although Mexico was at the epicentre of the post-election sell-off.
“We believe the whole discussion around Mexico may be instead focused on security.”
“Our view is that candidate Trump took a very hard line on a number of different issues and he is now walking them back, as he may also do regarding his initial position on trade.”
Additionally, according to the firm’s Global Fixed Income team, the emerging markets could also now better absorb the shock associated with the depreciation process due to the fact that their currencies were not pegged to the US dollar anymore and the majority were free floating.
Therefore their currency valuations adjusted lower and could act as shock absorbers.
“When Brandywine Global thinks about the dollar and its potential to appreciate or depreciate, we tend to do that on a more trade-weighted basis.
“In our view, the dollar could continue to appreciate against some of the majors but perhaps not as much against some emerging market currencies, which we believe are already mispriced against the dollar,” Lawrence said.
