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What a Trump victory portends for emerging markets and the local economy

Proshare

Wednesday, November 09, 2016 4:12 PM / CardinalStone Research

Following Donald Trump's victory in the just concluded US presidential election, we highlight below our thoughts on the implications for emerging markets and specifically Nigeria.

Impact on emerging markets and global economy dependent on Trump's approach to China

Trump's landslide victory in the just concluded U.S. election came as a big surprise to both local and foreign analysts. In the run up to the elections, global analysts had forecast a likely stock market crash and world recession if Donald Trump became elected as the next U.S. president.

The reasons are not far-fetched - Trump's policies especially on trade and the economy were mostly difficult to interpret. Trump's specific plan for trade relations with China however, holds very big concerns for commodity dependent economies which have been severely hurt from the decline in commodity prices coming from the slowdown in China.

His campaign policies included labeling China as a currency manipulator and instructing trade cases against China both in the U.S. and at the World Trade Organization (WTO), with claims that almost half of US manufacturing trade deficit is the result of trade with China.

If Trump follows through with these policies, we could witness a contraction in China's exports and a further slowdown in China's economy. China's economy has been slowing consistently over the last 5 years with 2015 GDP growth at 6.9% (compared to 10.6% in 2010).

Further contraction in China's economy will be negative for the global economy and particularly more negative for African economies dependent on export of base metals to China.

Russia may benefit

On the other hand, the Russian President seems to be excited with Donald Trump's victory. If this translates to a reduction in US sanctions, the Russian economy may rebound from an 18 month recession.


Therefore, the implication of Donald Trump's victory on the outlook of emerging markets is largely dependent on how his policies are implemented. On the surface, there's a risk of an economic slowdown especially as it relates to China as well as possible contagion to other emerging and frontier market economies.

We expect investors to remain largely cautious, with the likelihood that sell offs may persist in emerging market assets until clarity on Trump's policies unfolds.


Trump's victory spurs weakening of the dollar - somewhat positive for Nigeria 
There is a potential upside for Nigeria - the weakening US dollar relative to the Naira, as the odds of an interest rate hike by the Federal Reserve are lower with Trump's victory. Global markets have started reacting in early hours with sell offs of dollar assets.

While this may bring some respite to an already weak Naira, we believe the impact might be short-lived as markets readjust while awaiting clarity on Trump's policies. In the interim, we do not envisage that the weakening of the Dollar will be substantial enough to significantly strengthen the Naira and incite major interests in Naira assets.

However, the medium term impact on the Nigerian market will be dependent on the specifics of Trump's policies. In another vein, if Trump follows through on his plans to deport illegal immigrants, there may be a decline in foreign remittances to Nigeria and foreign remittances are a key component of our current account balance. 

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