Why Emerging Markets Will Grow Regardless of Trump

Emerging markets have experienced a bumpy ride. Many are burdened by the slump in commodities, high levels of debt, and poor fiscal policy, which conflated to cause economic growth across the developing world to stall. This was worsened by a strong U.S. dollar and a deteriorating global economic outlook.

There are now fears that a Trump presidency will further hurt emerging markets, primarily because of his tough rhetoric on trade.

Regardless of these worries, there are indications that growth will return to many of these markets despite Trump’s stance on protectionism and international trade.

Now what?

The key to growth in emerging economies is commodities.

You see, the large majority of emerging markets are heavily dependent on commodity prices for economic growth. This is because many are caught in the extractive trap where the extraction and export of commodities generates the majority of their export income and a large proportion of their GDP.

Now that commodities, or, more specifically, metals and coal, are bounding ahead, many will experience a surge in export income and economic activity that will drive higher economic growth. This couldn’t come at a better time for developing nations; many have experienced significant economic downturns over the last two years.

Brazil, the world’s eighth-largest economy, has fallen into its deepest economic crisis in almost a century, and it will benefit from the recovery in metals because iron ore, other ores, and steel make up a considerable portion of its exports.

Then there is Chile, where copper is by far the single largest export, meaning that its economy should experience stronger growth as copper, which quietly experienced its largest rally in four decades, continues to rally. The same will occur in Peru, where copper ore is also the top export.

More importantly, metals and steel-making coal are expected to continue rallying with many industry insiders proclaiming that the commodities slump is over.

The world’s largest miner, BHP Billiton Ltd. recently gave what some analysts are claiming is its most positive assessment on commodities in five years. It stated that commodities are in the midst of a turnaround being led by renewed infrastructure development and construction activity in China.

There are signs that China’s steel consumption continues to grow, which will underpin even greater demand for iron ore, metallurgical coal, and nickel.

Notwithstanding his stance on trade, a Trump presidency will benefit many emerging markets because of his stated intention to invest heavily in infrastructure. This will further buoy iron ore, coking coal, nickel, and copper, which should help to boost economic growth in Peru, Chile, and Brazil, as well as other emerging markets. 

So what?

While many institutional investors believe that emerging markets will remain under pressure for some time because of Trump’s anti-free-trade stance, I believe that they will benefit significantly from the surge in metals and coal. This makes now the time for investors to add some emerging-markets exposure to their portfolios.

One of the easiest means of doing so is the iShares Core MSCI Emerging Markets IMI Index ETF (TSX: XEC), which is up by almost 6% for the year to date.

Another option which gives exposure to Latin America is Brookfield Renewable Partners LP (TSX: BEP.UN)(NYSE: BEP). It is among the leading electricity generators in Colombia, where it has 3,000 megawatts of hydro and geothermal capacity. It also has 1,100 megawatts in Brazil, where it should experience an increase in demand as Brazil’s economic recovery continues.