Emerging markets’ exposure to US in the face of protectionism

On average, direct exports to the United States from emerging countries represent 6% of these countries’ GDP. However, this average hides huge disparities between Mexico (26%) and Vietnam (20%) on the one hand, and Egypt (less than 1%) and Russia (1.2%) on the other. This direct exposure is only part of the problem. For example, a commodities exporter is exposed to world growth and thus to US growth expectations, regardless of whether or not they export directly to the United States. It is, however, interesting to note that the performances of the various emerging equity markets since the election appear to be inversely proportional to their direct exposures to the US market. The statistical relationship is small but significant. The message being sent out by the markets looks positive for world growth (global equities, including emerging market equities, are up), while still showing some concern about the potential for protectionist policies being put in place, as was widely discussed during the campaign.

That said, the first weeks of the new US administration have given us some hope on this subject. Contrary to what had been announced, China has not been denounced as manipulating its currency. The renegotiation of the NAFTA remains a stated goal, but it lacks the urgency that had been feared. The 45% customs duties on Chinese products that had once been touted are no longer on the agenda. Further, growth expectations have improved, which should have a positive affect, all other things being equal.

So, for the investor looking to remain cautious in the face of a potential decline in the economic environment, what are the market segments that should be kept an eye on? Of the over 400 emerging firms for which we have data on their direct exposure to the US market, 25% have an exposure of more than 10% of their turnover, and in 16% of cases, this exposure exceeds 25%. By analysing this second group more closely, we can see that the companies concerned come from across the whole universe, but the technology and healthcare sectors are overrepresented, while financial names are underrepresented.

In country terms, Mexico (of course), India and Taiwan have the most names relative to their weighting in the starting universe. China, in contrast, only accounts for 4% of the companies in this group. This last example, just as India does inversely, shows that the listed sector does not always give an accurate representation of the entire economy.

Depending on which steps are taken, along with the highly expected reform of corporate taxes, the results of a significant exposure to the US market could vary massively for emerging firms. For some of them, this exposure is the result of investing in industrial assets on US soil, which is exactly one of the goals of the new administration. A company such as Hyundai Motor Group has already invested significant sums in setting up on US territory and is looking to increase this sort of investment. Similarly, the Hon Hai Precision group – a key player in the iPhone production chain – recently floated the idea of having a US production base. This example shows the complexity of the problem. A large number of so-called US economic “champions” depend on their foreign partners and they all have an interest in finding common solutions. And in a scenario in which taxes on trade are set to rise, a local presence could form part of the solution rather than the problem for many of these companies.

It is thus difficult to know if the market’s latent concerns are justified at this stage. However, for the first time in a long time on equity markets, the size of customs barriers and market access are at the forefront of investors’ minds, over purely financial transmission channels.