EM risk: ‘Trump tantrum’ is temporary – Goldman Sachs

Analysts at Goldman Sachs note that since the US election on 8 November, EM asset markets have been roiled by a ‘Trump tantrum’, a mix of both higher DM yields and falling EM asset prices.

Key Quotes

“At first glance, this price action in EM makes sense. Many of the policies advocated by President-elect Trump, particularly US trade policy, appear to pose large downside risks to EM economies. But the overall policy mix, if it results in stronger US growth and inflation alongside commodity price increases, may benefit parts of EM. We have consistently found that when stronger US growth accompanies higher US rates, EM assets can prosper, especially EM equities and spreads. Hence, while we expect a bumpier ride as EM markets adjust to higher US rates, we nonetheless see EM as a beneficiary of better US growth.”

“But EM markets are likely worried about more than just growth. In particular, it is possible that markets are also pricing the incremental risk of US protectionism. We think such concerns are overdone. While the rhetoric around trade negotiations seems certain to grow louder, we are tentatively of the view that Trump, and especially the Republican Congress, are the free-traders they claim to be. We nonetheless see a real risk that aggressive public rhetoric around trade negotiations (which we find harder to judge at this point) could intermittently weigh on the sentiment towards EM.”

“On net, we think EM assets are poised to perform once the current move in core rate moves begins to stabilise. In support of this view, it is important to recognize the many differences (mostly positive) relative to the ‘Taper tantrum’ episode of 2013. EM economies today have stronger external balances, higher real carry, better valuations and more encouraging signs of an improving growth outlook. All these factors should help support the ‘good carry’ stories in EM (such as BRL, RUB and INR) that are less heavily positioned and less exposed to US trade and demand, and hence less exposed to the risk of a ‘Trump trade tantrum’.”