Donald Trump is making emerging markets safe havens
In the summer of 2013, as all hell broke loose in markets, Morgan Stanley published a list no nation wanted to be on. The “Fragile Five” economies included Brazil, India, Indonesia, South Africa and Turkey.
Five years on and one US election later, the buzz is more about booming emerging markets. Even before Donald Trump came along, India and Indonesia had been moving toward favoured-investment status among the Wall Street set. Fourteen months into the Trump era, Asia’s growth stars are still holding their own.
Two big things have changed for both New Delhi and Jakarta since 2013. One, new governments pledging to take on vested interests and hone competitiveness. Two, US President Trump mounting a trade war aimed at the world’s biggest and most open economies.
That puts sizeable and rapidly growing, but less integrated economies at a unique advantage. In Asia, that primarily means India, Indonesia and the Philippines. Some might say Malaysia, too. But uncertainty abounds as an upcoming election pits Prime Minister Najib Razak against his nemesis, Mahathir Mohamad.
China is most certainly out as Trump’s White House targets Xi Jinping’s government. Of course, Trump’s tariffs on $50 billion of mainland goods, and other moves to come, could end up being a reason to avoid most of Asia’s emerging markets. A trade war, coupled with credit excesses, could accelerate the arrival of China’s “Minsky moment”, when a debt-fuelled boom ends badly. Even if that doesn’t happen, China has its work cut out to keep growth near 6.5% this year.
The real advantage for India, Indonesia and the Philippines is vibrant and growing middle-class consumer sectors. The economic inertia that affords is a powerful shock-absorber as Trump’s “America First” mindset collides with much bigger targets, including Europe and Japan.
Tokyo is already collateral damage. No leader has bowed more deeply to Trump’s presidency than Prime Minister Shinzo Abe. Not that it’s done much good. Buyer’s remorse abounds as Trump’s tariffs, weak-dollar policy and general erraticness imperil Tokyo’s reflation efforts. The crazier Trump gets—his mushrooming legal troubles almost ensure it—the more Japan’s longer-term trajectory will suffer. Abe, remember, is just one misstep, real or imagined, away from Trump attacking Toyota Motor Corp. or the yen on Twitter. It’s happened before.
South Korea also finds itself in a jam. While it’s technically still a developing economy, Korea’s high labour costs put Asia’s No. 4 economy in a tight spot. Trump is taking credit for General Motors threatening to yank as many as 16,000 high-paying jobs from Korea. He’s forcing President Moon Jae-in to renegotiate the Korea-US free-trade agreement, one that had been in effect since 2012.
Seoul also is the site of a tense proxy war between Trump and Chinese President Xi. Beijing is livid Korea welcomed the construction of US missile-defence systems. In retaliation, Xi’s government cancelled mainland tour groups to Korea and rejected visas for K-pop stars. Lotte department stores in China were shuttered, while Hyundai car lots went silent. Moon could be excused for feeling squeezed from both directions.
Taiwan? The tech-heavy economy is currently caught in the middle of a “Game of Thrones” vibe between Beijing and Washington. China considers the self-governed island a wayward province. At last week’s National People’s Congress, Xi said Taipei would face the “punishment of history” if it doesn’t toe Beijing’s line. Trump, meantime, wants to cosy up to Taiwan. Any sabre-rattling could be bad for business.
Granted, India, Indonesia and the Philippines are plagued with their own troubles.
As Prime Minister Narendra Modi put it recently, India has three big things going for it—democracy, demography and demand. This last one is likely to propel India into the ranks of the top-five economies, leaving the “Fragile Five” in the rear-view mirror. The problem is the growing gulf between what Modi promised and actually achieved. More assertive efforts are needed to open protected sectors and modernized labour, land and tax regimes.
In Jakarta, President Joko Widodo remains popular, thanks to improving infrastructure and healthcare. He hasn’t, though, boosted growth to India-like levels above 7%.
Philippine President Rodrigo Duterte’s government seems to be doing more shooting—at drug dealers and users—than financial retooling. Duterte must work harder and faster to keep the reform drive of predecessor Benigno Aquino on track. But developing Asia has some enviable cushions as Trump does his worst on trade, the Federal Reserve hikes rates and the biggest economies struggle to keep their balance.
Developing Asia’s stock markets are cheaper on a relative basis and central banks have greater firepower. The Reserve Bank of India, for example, has 600 basis points worth of latitude to cut the repurchase rate, if need be. That’s a nice luxury to have as all hell breaks loose.
Really, who knew Trump’s bombast would make emerging-market economies great again?
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.