Protecting against ‘Protectionism’

The rising risk of global trade, capital and labour protectionism is an important investment topic. Protectionism affects both emerging and developed markets, in our view.

Some countries have found different paths around rising global protectionism. This is in particular true for the Emerging markets where new trade agreements are being finalized, certain economic sectors are being supported (in the advent of protectionism) and official efforts are being made to expand trade in existing regional markets. There are three trends in particular that investors could consider in their investment decisions when seeking to overcome protectionism.

First, investors can look to identify sectors that are naturally less prone to protectionism: for example commodity related equities have in the twelve months to May 2017 been doing very well compared to the industrial sector equities. This may be due to different commodity producers in the world have little or no competitors in the countries where the governments might be considering protectionist policy. If, for example, the US acts to block the import of rare metals from China, Tesla would struggle to make the motors and batteries for its vehicles.

Second, Emerging markets are moving to strengthen political and trade alliances with each other, with China and could start increase their exchange with Japan. The countries that can improve political ties with China and with other big proponents of free trade (such as Japan and Europe) may outperform in a climate of rising protectionism.

Third, another way for a country to boost GDP growth is for policy makers to focus on domestic consumption and create national champions. Investors should in their asset allocation decisions consider the impact of protectionism and how different countries and companies can circumvent protectionism.

Koon Chow – Emerging Markets Macro and FX strategist – Union Bancaire Privée