If an impending trade war is about to create havoc for emerging markets, someone forgot to tell investors. Emerging-market equity inflows have continued apace since the specter of a trade war emerged at the beginning of March. (Dollar-denominated emerging-market debt moved to modest outflows, moving similarly to U.S. investment-grade corporate debt.)
EXD = dollar-denominated emerging-market debt HY = High yield
EM = emerging markets
IG = Investment grade
Source: Bank of America Merrill Lynch Research
The largest U.S.-traded emerging-market ETF [NYSE: EEM] has behaved well, remaining in a trading range as trade-war anxieties have ebbed and flowed and as the ongoing sideways correction in global markets has continued.
In short, EM investors are behaving largely as if they share our view of the likely nature and trajectory of current trade negotiations:
• Current verbal positioning on both sides does not represent a “final offer,” but is simply the opening phase of longer formal negotiations;
• Chinese President Xi’s conciliatory remarks at an Asian economic forum on April 11 show at least that he is intent on calm — and may suggest that China will wait for a more pliant White House before openly resuming some of their more egregious trade behavior;
• In the lead-up to fall mid-term elections in the U.S., President Trump likely believes that his base will respond positively to his rhetoric on trade. However, that base is also more fundamentally concerned with robust economic growth and with jobs — so the President is unlikely to plan or take actions that would cause real economic damage;
• Though not currently on the front burner of mainstream media, North Korea remains a point of concern, and perhaps a point of pride for the U.S. President in his ambition to create a lasting solution where his predecessors failed — and China’s cooperation remains key for any such solution;
• Steel and aluminum tariff announcements are more intended to put pressure on current NAFTA negotiations, ahead of July’s Mexican elections that may put a left-leaning president in power in Mexico, than they are aimed at China.
Investment implications: We continue to believe that several emerging markets could perform strongly for the duration of the current global expansion, particularly Asian manufacturing exporters. We currently favor Vietnam, Thailand, and India; within China, we favor social media and internet tech leaders.