BlackRock: Emerging Markets Could Benefit From Trade Wars

From BlackRock: Richard explains why trade war risks have been lowered in the short term, and what it could mean for markets.

We see the reduced risk of trade conflicts in the short term, as Donald Trump’s White House appears to have softened its attitude toward both the North American Free Trade Agreement (NAFTA) and China. This could bode well for emerging market (EM) assets.

The chart shows that both EM equities and the Mexican peso have staged a comeback from the sharp declines following Trump’s election. The Mexican peso – poster child for the leg of the “Trump trade” that involved dumping EM assets – has made a round trip, returning to levels seen before the U.S. election. EM equities’ performance relative to their developed market peers has been on the mend.

Second thoughts on free trade

Trump‘s victory sent tremors across EMs as the risk of trade wars spooked investors. But the threat looks to have receded, especially after the Treasury Department did not name China a currency manipulator in its first foreign exchange policy review under the Trump administration.

There are other signs that the initial hostility is dissipating. The administration’s recent letter to Congress on renegotiating NAFTA pointed to a mild stance. Also, Trump’s April meetings with Chinese President Xi Jinping appear constructive, buying both sides time to address a large bilateral trade imbalance. In a show of cooperation, China has proactively offered some trade concessions.

We do see longer-term risks as the U.S. is likely to revisit some trade policies from the 1980s and pivot toward a transactional approach to trade. Geopolitical uncertainties are another concern. But in the short term, a lower chance of trade wars is good news for EMs that are benefiting from global reflation and solid domestic demand. Trump’s recent comments that the U.S. dollar is “too strong” and signs of a preference for a low-interest rate policy are also supportive. We see a declining EM risk premium as the market focuses on fundamentals, underpinning our overweight in EM equities. EM Asia equities stand out as a potential major beneficiary, in our view.

Read more market insights in my Weekly Commentary.

The iShares MSCI Emerging Markets Indx ETF (NYSE:EEM) rose $0.35 (+0.9%) in premarket trading Thursday. Year-to-date, EEM has gained 10.85%, versus a 4.43% rise in the benchmark S&P 500 index during the same period.

EEM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #2 of 77 ETFs in the Emerging Markets Equities ETFs category.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

This article is brought to you courtesy of BlackRock.

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