Walter Molano | Looking ahead to a more dramatic chapter
As 2016 prepares to fade away, we will be starting a new chapter of global development.
In a way, United States presidential terms help organise the narrative.
The last two presidencies have had strong characteristics.
The presidency of George W. Bush started with the bursting of a technology bubble, the terrorist attacks of 9/11 and the subsequent wars against Iraq and Afghanistan. At the same time, the US Federal Reserve accompanied with a relaxed monetary policy that resulted in a massive real estate bubble.
By the last year of Bush's mandate, not only had the bubble burst, but it had manifested itself into a full-fledged financial crisis that devastated the economy.
That raging firestorm framed the backdrop of President Barack Obama's inauguration, forcing the new economic team to resort to unorthodox policies and the Fed to the unprecedented use of quantitative easing.
Both presidencies started with watershed moments, undermining the electorate's trust in the nation's invincibility. This loss of trust was clearly reflected in the 2016 presidential campaign, when traditional candidates were trounced at the polls.
Now, we have to see what lies ahead.
Within this context, where there was a dramatic loss of confidence in US elites, it was only natural that the country would compensate itself through a dose of self-indulgence. This is the reason the xenophobic rhetoric resonated as well as it did.
The move to spend US$1 trillion on new airports, roads, trains and bridges is an attempt to heal the scars that were produced by lavishing trillions of dollars on foreign wars, defence treaties, aid packages and trade pacts. The same goes for the tax cuts and deregulation. They will work to dismantle the measures that were enacted to make the world a better place.
Of course, such a move will have consequences that are already reflected in the market. The fiscal stimulus will propel GDP growth, and will overheat an economy that was running at full capacity.
This means that inflation expectations will rise a view that is in full display in the bond market. Likewise, the stronger economy and higher rates will put upward pressure on the dollar. All of these forces will impact the emerging markets (EM).
To begin with, emerging markets are an alternative asset class. In other words, they are an alternative to investing in the core developed markets. The reason EMs were in vogue for the better part of the last decade is developed markets were under duress. The financial crisis of 2008 waylaid the US economy, and the 2010 euro crisis shattered the market's confidence in the future of the common currency.
With the developing world posting better fundamentals, asset managers increased their allocation to the emerging world. However, the US economy may be on the cusp of taking off and rates are on the rise. Therefore, some of the funds that were earmarked for EM will return home. This will make life harder for countries that depend on the international capital markets.
Unfortunately, Argentina is at the top of the list. Like a recovered alcoholic who falls off the wagon, Argentina is bingeing on the one thing that it can never say no to - foreign debt. Worst are the Argentine provinces. They are issuing high-interest bonds to cover current spending needs, with the false belief that they will be able to do the same in the years ahead.
Other Latin American countries are not so vulnerable. Many of the large industrial commodity producers, such as the Andeans, will benefit from the rise in metal prices.
We must remember that the US economy is 50 per cent larger than the Chinese economy. Hence, a significant increase in output will have a much larger impact on global demand.
The reconstruction of US infrastructure will create an enormous demand in metals, something that has already reflected in copper prices.
The strengthening of the dollar will also boost the competitiveness of Latin American exporters. The big question is, what will happen to Mexico?
President-elect Trump will focus much more on trade disputes and small alterations to existing treaties, instead of their abrogation.
For the next four years, the White House will be a veritable reality show, with the president constantly tweeting the latest trade disputes and deportations.
But, in the end, there will be no major changes to the existing trade pacts.
Nevertheless, the acceleration of the US economy will provide an important lift to the Mexican economy. There is a close correlation between the two economies, and this will not change. All in all, the days of easy financing are over for the emerging markets, and this will make life a little harder for the asset class.
• Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.