Fears abound that with the new US government in the White House, protectionism has also arrived, bringing a period of deglobalization as a result of retorsion measures, in turn significantly slowing economic growth.
While the risk of this happening has no doubt increased, Donald Trump’s bark will probably turn out in the end to be worse than his bite. That said, his entry into office certainly represents a break with the past for global politics. The shift in the focus of the US away from international and towards national interests (“America first” and isolationism) means that in the medium term the Pax Americana will be replaced by a more multipolar world order with greater geopolitical unpredictability.
In such an environment, investors are likely to demand higher risk premiums. However, the efforts to pursue a more active US fiscal policy also imply higher yield premiums. While this is supportive for growth, it also increases inflationary pressure, suggesting that US interest rates will be hiked and that the US dollar will appreciate. Both would result in tighter funding conditions for emerging market issuers. Following the tailwind from rising oil prices and their very positive performance in 2016, emerging markets bonds now face a chilly headwind in 2017.
Author: Johannes Oehri, Financial Economist, LGT Capital Partners