And even if Trump manages to build tariff walls, that could also bring opportunities for active managers. “Disruption in any form is both a threat and an opportunity. We focus on what types of companies it will benefit and what it is a threat to. We don’t worry too much about the idea of disruption. We like it because it feeds a lot of ideas,” said Chua.
It’s hard to argue, however, that EM companies will benefit from the disruption Chua is referring to. Benefactors are more likely to be found on the other side of the tariff walls, i.e.: in the US, or perhaps in markets not yet victimised by Trump.
The other threat for emerging markets is of course a Fed rate hike. In the past, Fed monetary tightening has hit EM assets, especially bonds. But over the past few years, a strong domestic investor base has emerged, especially in Asia.
“15 or 20 years ago, companies got in trouble because they didn’t have dollar earnings and relied on foreign financing. The bulk of debt is now financed from a domestic investor base. Therefore we don’t expect short-term dislocations [as happened most recently following the Fed’s ‘Taper tantrum’ in 2013],” said Leigh Innes, an emerging markets specialist at T. Rowe Price who also spoke at the Reykjavik forum.
“It’s disingenuous to point the finger at EM,” added GAM’s Tim Love, who stressed that emerging markets are responsible neither for the global debt build-up nor for the money printing that has come to define the post-crisis financial system.
Emerging market economies indeed haven’t relied as much on central bank stimuli as their developed counterparts. But the wall of money that has reached emerging shores in in recent years has been in large part a consequence of these very policies, pushing prices of EM assets and fuelling a corporate debt binge, as EM companies took advantage of cheap access to dollar funding. Recent research by the Institute of International Finance showed that the total debt-to-GDP ratio of EM non-financial corporates is now higher than its developed market equivalent.