Throughout Asia, equity markets have enjoyed a good 2017 so far. The current cyclical upturn in both developed and emerging markets has seen an improvement in exports from throughout the region. Asia and the broader emerging markets have made strong gains this year as capital is rotating back into the region, partly because valuations in the US appear stretched and partly due to the expectations that Asia will benefit from an improving global outlook.
One risk to this improvement is any protectionist US trade policy under President Trump. A general border tax or high tariffs on specific sectors such as steel would be unhelpful to Asia. Whether such measures will be implemented is becoming less certain.
Emerging market countries are benefiting from improving commodity prices and the continuing shift of low cost manufacturing from China to smaller Southeast Asian countries. Emerging markets are sensitive to the global growth cycle but some are suffering from the strength of the US$ which can lead to tighter financial conditions for economies with high US$ borrowings. Higher US$ raw material costs eat into profits while US$ denominated debt is more expensive. However, those countries who’s exports are priced in US$ such as oil benefit from the stronger dollar.
India stands out as a key market in this region. While it experienced a sharp monetary shock in 2016 soon after the government withdrew two banknote denominations from the physical money supply, this measure was aimed at fighting corruption and to broaden the country’s tax base. India has a sustainable growth rate of 6%-7% per annum driven by structural growth factors, a young population and great scope for growth in per capita income.
A more protectionist USA could affect countries such as Mexico, Vietnam, Malaysia and Thailand while India, Indonesia and Russia are less affected by any new Border Adjustment Tax if one is ever brought in. A greater number of countries may see further free trade agreements. Mexico already has 45 FTA’s in place, the most in the world. Mexico is in discussions with Brazil, Argentina, Australia, New Zealand, Singapore and Malaysia to set up further agreements and reduce trade barriers further. Mexico’s progress in free trade agreements is something the developed world could emulate.