M&G’s Calich: Trump’s failures benefit emerging markets

M&G bond manager Claudia Calich says Donald Trump’s failure to deliver his election campaign pledges has been positive for emerging markets.

The manager of the £495.2m M&G Emerging Market Bond fund also lists the Middle East and Africa as potential losers from tightening Federal Reserve policy, while Eastern Europe and India can better navigate a rising US dollar.

The US Fed voted to keep rates on hold at its meeting on Wednesday, but signalled a December rate rise was on the cards. Trump is expected to name Jerome Powell to replace fellow dove Janet Yellen as chair of the central bank today.

Calich, who took over the bond fund from Mike Riddell in 2013, says perceived risks around Trump have diminished from a year ago. The US president targeted a number of emerging markets in his divisive election campaign, including Mexico, China and Islamic countries in the Middle East and Africa.

“Maybe the good thing that is happening in the administration is it’s so disjointed with all sorts of internal problems that nothing is happening for good or for bad,” says Calich. “Yes, it’s a missed opportunity for the US but in terms of emerging markets it hasn’t been as bad as we feared a year ago.”

She says on the Republican president’s election a year ago emerging markets feared trade tariffs, mass deportations of Latin Americans from the US and currency manipulation charges against China.

“If you look back not much has happened,” Calich says.

A US Treasury currency report released last month refused to name China as a currency manipulator, although noted it was on its “monitoring list”. Trump is planning to meet president Xi Jianping this month in Beijing.

Various iterations of Trump’s ban on visitors have been blocked by US courts and figures released in September showed the US was on track to deport fewer people in the 2017 fiscal year than previous years.

Losers from US tightening

Emerging markets could deal with the two to three rate hikes over the next year currently priced in, says Calich.

However, countries in the Middle East and sub-Saharan Africa would could suffer from anything more aggressive, she says.

Turkey has a “huge” current account deficit and banks have refinancing risk, while Gulf countries have currencies pegged to the dollar, says Calich.

The UAE, Saudi Arabia and Qatar are all pegged against the US currency, as well as Jordan, Bahrain, Lebanon and Oman.

In contrast Eastern Europe and India are less impacted by what happens with US rates and more impacted by the ECB and the Reserve Bank of India respectively.

Calich says she is currently finding more opportunities in local currency debt.

The M&G Emerging Market Bond fund is overweight sub-Saharan Africa and slightly in the Middle East. It is neutral in Latin America and underweight Asia and China.

Calich says fundamentals in China have been “a little bit better” this year, but valuations hadn’t been attractive.

The fund has returned 0.8 per cent over the last year compared to a 0.8 per cent loss in the Global Emerging Market Bond sector and doubled the returns of its peers over a three year period with 40.5 per cent compared to 19.5 per cent.

Calich also manages the M&G Emerging Markets Hard Currency Bond fund, which launched in May.