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bne December 2020 Cover story I 27
chief economist at Renaissance Capital, thanks to the change of administration in the White House.
One of the remarkable features of the Trump presidency is that FDI reversed and the net flow was into the US, whereas previously American investors were a net investor into foreign markets.
Speaking at the bank’s 25th anniversary conference, Robertson explains it simply as companies couldn't predict which market Trump would pick a trade fight with next, and so bring down punitive retaliation, so they chose to build new factories at home, despite the higher wage bill. At the same time Trump introduced tax breaks for US companies investing at home. Combined this reduced outbound FDI by $200bn in 2018 and kept outbound FDI to under $100bn in 2019 and 2020.
The last time EMs were booming, US FDI to other countries (not just EM) rose to
a 2007 peak of $400bn annually, well
in excess of the peak value in the period of a little over $200bn. The difference was an FX outflow worth nearly $1bn per working day and dollar weakness
is usually good for EM markets. Under Trump the US attracting a net $1bn
of inflowing FDI a day, which lead to strengthening of the dollar.
As the trade wars are due to end, those FDI flows are expected to reverse again with EMs being one of the biggest beneficiaries. Robertson is predicting a medium term consistent weakening of the dollar as a result of the FDI outflows that will lift EM markets.
“Unsurprisingly, when MSCI EM is about 40% China, the trade wars have not been helpful to the EM investment case. With President Joe Biden, we expect the US
to build stronger links with America’s allies, rather than to escalate attacks on them,” says Robertson.
Robertson thinks it will take a little time for this FDI reversal to kick in but by 2022 the flows will return to their 2007 levels that will bolster inflows into EM markets and at the same time lead to
a sustained weakening of the dollar.
A $1bn a day flowing out of the US into EM markets is a lot of money.
Another expected dynamic is the falling inflation rates that will lead to a fall in bond yields as central banks across the EM world continue to cut rates. Ukraine’s inflation performance has been outstand- ing in the last two years with the NBU aggressively bring inflation down from double digits to only 2.6 as of October – its lowest level in modern history. The story in Russia is the same with inflation down to 4% as of October and overnight rates repeated slashed to the current 4.25%.
There was a boom in local bonds invest- ment in 2019 after several markets in Central and Eastern Europe (CEE) got hooked up to the Clearstream internation- al settlements and payment system, but as the yields fall investors have already begun switching into equities – a trend that is expected to continue and gather momen- tum in the coming two years.
“So for the first time in years, probably since the taper tantrum in 2013 and the commodity crash of 2014, we think there are good reasons for a sustained bull run in EM,” concludes Robertson.
Overview of the World Economic Outlook Projections (Percent change, unless noted otherwise)
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