The Trump risk for emerging Asia

IFR Asia 979 - February 18, 2017
5 min read

Forgive me for adding to the slush-pile of comment on the newly installed Donald Trump administration, but I think it’s justified. I doubt that any investor, whether private or institutional, can afford not to have their eyes on the ball when it comes to the potential for the latest executive order from the White House to stymie their otherwise rational assessment of global capital markets.

One thing we have learned so far with the Trump administration, less than a month into its chaotic beginning, is that the president is prepared to act with little thought of the ramifications. The travel ban on nationals of seven “countries of particular concern” is a prime example of macho thinking scribbled on the back of an envelope. Trump supporters say he was simply honouring his campaign pledge.

Maybe the overruling of this shock executive order by the US courts will prompt a pushback or, alternatively, reinvigorate the checks and balances built into the American system of government. In any case, what must a fund manager with a portfolio denominated in a multitude of currencies do?

Trump wants to make America great again. That means – if you read the back of the envelope “correctly” – that various inputs which have contributed to the growth of emerging markets over the past 50-odd years can be potentially neutered.

I WAS TRYING to put myself into the mind of Donald Trump – something of a disquieting location, but a useful thought exercise – and wondered just what he might cook up with the help of his advisers. It seemed to me that one angle would be to limit the use of offshore dollars for borrowing by emerging market countries.

That would crimp the available offshore capital for economic growth and push dollar asset managers naturally towards investing in US corporate debt. It might seem far fetched, but the IMF and others have published papers on the topic of restricting the use of offshore currency for borrowing purposes. There are clear implications for such a strategy, but more of that later.

The other option, which has been aggressively mooted by President Trump but has yet to be enacted (by his shiny new executive-order toy), is to penalise US-sourced foreign direct investment.

US FDI has been a significant driver of economic growth in emerging market countries and, although there is plenty to go around in Asia from the likes of China, Japan and South Korea, a wholesale retrenchment of FDI from America, with some brutal grandfathering thrown in for existing projects, perhaps on the back of a too-good-to-refuse tax break, doesn’t bear thinking about.

There are some other outliers in terms of what Trump may impose in his tempestuousness. One thinks of the potential for Malaysia, Indonesia or the Philippines to enter the travel ban list should they be perceived as likely to export “radical Islamic terrorism”. Malaysia’s exploration of Hudud Islamic law and attacks by Islamist militants in the South of the Philippines suggest that this is not an absurd projection. The latter relies immensely on overseas remittances from the United States and a travel ban would make a severe dent in the Philippines economy.

None of any of this is pleasant to countenance, but that is the reality of what is likely to emanate from Donald Trump’s White House.

INDEED, IT OCCURED to me that US Treasury bonds now carry more political risk than they have for years. The risk is multi-faceted, from the possibility of Trump getting impeached – the odds at a leading British bookmaker were last at two-to-one – to his undermining the integrity of the Federal Reserve or to his dangling the prospect of Treasury bond default and restructuring. I’m sure the readers of this column could come up with a few of their own.

Ironically, the greater the political risk on US Treasuries, the more likely they are to rally in yield terms, given the obvious potential for that risk to be exported to other markets and for the natural flight-to-safety into Treasuries to occur as it always does.

The winner in all this is China, Mr Trump’s arch foe. As Trump throws the toys out of the pram like a teething, petulant child, so China acts with eminent maturity. We saw evidence of that two weeks ago when the country granted JP Morgan and BNP Paribas licenses to underwrite corporate bonds in China’s interbank market.

Meanwhile China is presiding over a vast drive into sustainable investment, having announced a near US$400bn initiative to support renewable energy in the country as well as the closure of more than 100 coal-fired power stations. Do they know something the climate change-denying Donald doesn’t?

Of course, a restriction on offshore borrowing in US dollars will only serve to strengthen the renminbi’s status and drive it ever closer to becoming the world’s reserve currency. The copybook on making America great again is being written somewhere else, by and for the benefit of another country. President Trump should pay close attention.

Jonathan Rogers_ifraweb