Investors are concerned that Trump’s protectionist stance will damage emerging markets growth. While geopolitical events and their impacts on portfolios are difficult to predict, fundamental analysis from Morningstar Investment Management Europe shows emerging markets equities remain attractive relative to other asset classes.
 
Dan Kemp, Chief Investment Officer for Morningstar Investment Management in EMEA, comments:

“News headlines are now dominated by President Donald Trump’s apparent dislike for the trade deficit between the US and China. For investors, such sentiment can all too easily resonate, encouraging them to seek investment positions that will benefit from swift action taken by the new President.
 
“While American manufacturing jobs have undoubtedly moved to China, the resulting fall in prices has raised American living standards and placed a cap on interest rates. This has encouraged many households to invest in growth markets, raising asset prices and further enhancing the sense of prosperity. The huge trade imbalance created by globalisation has thus conferred many benefits on the American people, yet some expect this multi-decade relationship to unwind within a matter of weeks or months.

“We see at least two dangers in making this assumption. First, we don’t know if and how this will play out. Second, investors seldom predict the outcomes of geopolitical events, or draw the correct inferences for asset price movements. This is not usually because of a lack of knowledge, but because they are attempting to delineate other people’s emotional reaction to an event that has not yet happened.

“The only rational answer is to focus on the long-term fundamentals which will ultimately drive long-term performance. According to the long-term fundamental drivers, our analysis shows that emerging markets have a positive long-term yield, a positive long-term pay-out growth rate, and a relatively flat long-term valuation adjustment. All things considered, this equates to a total valuation-implied real return of 4.4 per cent per annum.

Source: Morningstar Investment Management calculation at 31/01/2017
 
 “The question is whether a 4.4 per cent real return is enough to warrant a holding, and if so, how to size any position. Few of the countries covered by the MSCI Emerging Markets index could be described as having mature institutions in stable democracies with a strong legal framework and regulation. We must therefore seek a greater margin of safety when investing in emerging markets.

“Emerging markets are currently in line with our assessment of fair value and we are not excited in absolute terms. However, these markets do appear attractive relative to other equity asset classes and in an environment of continued low interest rates, investors cannot achieve a real return by holding cash and bonds. Consequently, emerging market equities remain one of our favoured destinations for long-term capital investment.”
 
For further information, or to speak to Dan Kemp, please get in touch at tina.gould@morningstar.com or + 44 (0)20 3194 1092.