EM develop new consumption-based models
Many emerging markets (EM) economies are developing consumption-based economies that will insulate them from the worst effects of protectionism, according to GAM Investments’ emerging markets equities investment director, Tim Love.
He stressed that Donald Trump’s imposition of a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminium imports should be seen not as an isolated event but as part of an ongoing expansion of protectionism in recent years.
According to him, when it came to investing in EM, an economy’s percentage of external trade to total GDP was key.
“This is often greater than at first perceived, as value chains and international supply chains complicate the picture,” he said.
In general terms, China, Korea and Mexico were the most exposed emerging markets economies.
However, he said the impact on equity markets often depended on “what’s already discounted” in the price.
“The issue is whether that discount is widening more or contracting, as the probability of further protectionism increases or abates,” Love said.
“In addition, there is a question of the degree to which a country’s domestic policy reforms may materially influence its vulnerability to protectionism. A move towards greater domestic demand reforms versus the old 'Asian Tiger' export model is a plus."
He also stressed that India and China both fell into this category, with strong government-backed programs enhancing the shift away from a primarily export-based model.
According to him, the only exception was Russia, which failed to move away from hydrocarbons to a high value-added diversified economy.
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