Weekend Reading / Global

Biden's US foreign policy would be positive for Emerging Markets

  • A break from Trump's style but not a restoration of Obama given post-2008 changes in big tech, China, GCC, oil, populism
  • Biden's most likely big changes: end China trade war and restart TPP, rejoin Iran nuclear deal and Paris climate accord
  • Little change likely on Africa, India, Israel, Russia, Venezuela, major wars. Overall, would be positive for EM
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Four Biden versus Trump foreign policy contrasts - multilateralism, trade, Iran, climate: all would be positive shifts for emerging market investors

There appears to be very little difference between Biden, Trump and the US Congress on the description of China as a long-term geopolitical rival, the view of Iran, North Korea and Russia as security threats, the sanctity of the security of Israel, and the maintenance of US global military supremacy. 

However, on the basis of his public comments, eg in the March-April 2020 edition of Foreign Affairs, from which we highlight quotes below, we identify four clear differences between Biden and Trump on foreign policy that would materially affect risks associated with emerging markets: 

  1. Multilateralism;
  2. Trade;
  3. Iran; and 
  4. Climate.

"The United States does need to get tough with China. If China has its way, it will keep robbing the United States and American companies of their technology and intellectual property. It will also keep using subsidies to give its state-owned enterprises an unfair advantage – and a leg up on dominating the technologies and industries of the future."

1) Multilateralism  Although Biden's assessment of potential threats is similar to Trump's, the method for his proffered response in every case is based on multilateralism, building the broadest coalition of allies and using existing international institutions, as opposed to Trump's unilateralism. This approach likely leads to more predictability in US foreign policy and more negotiation in advance of those changes. To the degree that investors react most to unpredictable geopolitical news as opposed to bad geopolitical news, this might reduce the perception of risk in emerging markets. The challenge for Biden, or any future president after Trump, is that the credibility of any US signature on a long-term multilateral agreement has been damaged and may take a long time to rebuild.

"On its own, the United States represents about a quarter of global GDP. When we join together with fellow democracies, our strength more than doubles. China can’t afford to ignore more than half the global economy. That gives us substantial leverage to shape the rules of the road on everything from the environment to labor, trade, technology, and transparency, so they continue to reflect democratic interests and values."

"To counter Russian aggression, we must keep the [NATO] alliance’s military capabilities sharp while also expanding its capacity to take on nontraditional threats, such as weaponized corruption, disinformation, and cyber theft."

2) Trade  Biden has made clear his opposition to the US-China trade war and the ultimately self-defeating nature of tariff escalations. The elimination of unilateral tariffs on China would clearly benefit trade volumes across the China-connected Asian supply chain (eg Malaysia, the Philippines, Vietnam). Furthermore, the multilateral response he espouses includes re-engagement in the Trans-Pacific Partnership (TPP), which should be positive, albeit in the very long term, for likes of Chile, Malaysia, Mexico, Peru, Singapore and Vietnam (less so for those outside TPP, such as Bangladesh, Egypt, India and Pakistan).

"More than 95 percent of the world’s population lives beyond our borders—we want to tap those markets. We need to be able to build the very best in the United States and sell the very best around the world. That means taking down trade barriers that penalize Americans and resisting a dangerous global slide toward protectionism."

3) Iran  Biden would attempt to resuscitate the Iran nuclear deal framework. Our view is that there are limits to hot military action with Iran (ie a full-blown war is unlikely under any US administration) and that, if Iran is bound by the nuclear deal and the potential to re-engage economically with the global economy, then the security risks of the broader Middle East region substantially reduce. The chastening experience of Saudi in both its Yemen war and in the precision attacks on Aramco assets and the destruction of the Iranian economy wrought by another bout of sanctions make both more likely to play their part in lowering those tensions under a new deal. 

"Tehran must return to strict compliance with the deal. If it does so, I would rejoin the agreement and use our renewed commitment to diplomacy to work with our allies to strengthen and extend it, while more effectively pushing back against Iran’s other destabilizing activities."

4) Climate  The Covid-19 crisis has laid bare the consequences of a lack of global coordination. In some respects, the climate crisis is another iteration of this. Amid the international recriminations currently underway as to how the virus originated and spread, it appears naive to expect a path to global coordination re-opening  and that implies higher long-term risk for all assets. Yet the growth of professional investment mandates that filter out the most egregious polluters suggests that there is consumer demand to slow down climate change. In that sense, US foreign policy that supports this agenda should be positive for emerging (and developed) markets. 

"I will rejoin the Paris climate agreement on day one of a Biden administration and then convene a summit of the world’s major carbon emitters, rallying nations to raise their ambitions and push progress further and faster."

The US electorate cares little for foreign policy but the president does

US voters currently care almost 30 times more about domestic issues (the economy, jobs, health care) than foreign policy ones (overseas conflicts, terrorism). Perhaps, we should neither expect the two candidates to focus much on foreign policy nor make much of a show of differentiating their foreign policies during the election campaign. 

Furthermore, the effectiveness of congressional checks on the president's foreign policy has proven quite limited unless there is divided government (ie control of the executive and legislative branches is split between the parties). And, even when there is divided government, presidents circumvent this, at least for the duration of their term, via the use of executive orders.

However, what Trump has done so effectively, dating back to his "America First" 2016 campaign, is to link aspects of foreign policy with the domestic economic agenda  linking his trade tariffs on China, exit from TPP and renegotiation of NAFTA as part of leveling the playing field for US-based businesses – and he is attempting to do the same with blaming China for the spread of Covid-19 and the resultant economic sudden-stop.

In addition to this, Trump has made profound changes to US foreign policy that are not so easily linked back to a domestic economic agenda: eg withdrawal from the Iran nuclear deal, withdrawal from the Paris Climate Accord, less support for multilateral organisations (including NATO), challenging military allies (such as NATO or South Korea), support for hardliners in Israel. Not all of these policies can be described as deliberate distractions from domestic issues, such as impeachment. 

Emerging markets care a lot about US foreign policy

Ultimately, for emerging markets, the trajectory of US economic growth, treasury yields and the US dollar are more important than US foreign policy. But US foreign policy, and particularly its extension into trade and sanctions policy, can still be a very powerful driver of asset prices in EM (putting to one side the additional volatility in markets introduced by Trump's twitter account). 

Examples under Trump include China tariffs (dampening trade volumes for the connected Asia ex-Japan supply chain but increasing capex into the parts of that supply chain with lower costs and tariffs, eg Vietnam), the Iran deal (raising the perception of risk in the GCC and Iraq) and Saudi (both initially emboldening Saudi and the UAE to embargo Qatar, and later, resisting Congressional pressure on Saudi Crown Prince Muhammad bin Salman after the Khashoggi Affair or Turkish President Erdogan after the purchase of Russian arms). 

Going forward, investors in emerging markets are going to be exposed to a number of areas where the direction of US foreign policy is central to the investment debate, eg:

  • How friction between the US and China plays out (ie does it become harder to navigate the middle ground between the two, enjoying sufficient respect of territorial borders, capital inflow and trade market access from both, without invoking the ire of either); 
  • Is US trade protectionism extended to other countries with lower-cost manufacturing (eg Vietnam);
  • To what degree US shale still allows the US to focus less attention on the Middle East and more on Asia; 
  • If the combination of India-Japan-South Korea remain key allies for countering Chinese influence in Asia; 
  • Whether Russia is challenged more overtly both via its neighbour states (eg Ukraine) and in the locations where it has established leverage further from home (eg Syria, Libya);
  • If the likes of Cuba, Iran and North Korea remain pariah states.

Biden would face the same external geopolitical constraints as Trump

Biden would face the same constraints as Trump that limit his room for manoeuvre in foreign policy.

  • The US electorate will not support mass overseas deployment of troops in new long wars. The US remains the dominant global military power (by far) but warfare has changed and this superiority does not guarantee its victory against smaller adversaries. This means that the US cannot easily impose its will in a regional geopolitical situation with the threat of military action alone.
  • China is a rising power not dependent on US protection (unlike Germany, Japan and South Korea). It is prepared to bide its time (it has the authoritarian tools, deep sovereign pockets and domestic scale to do so), engage in global institutions for making rules and managing coordination, and bypass those institutions when it does not get a large enough say in how they are run.
  • The US president determines the direction of foreign policy, but an uncooperative Congress can undermine its implementation and bipartisan consensus is rare not when the next election is approaching and a consensus forms behind what should be an electorally popular agenda for all but, rather, once a new administration is formed.

Biden obviously closer to Obama than Trump but the world has changed since 2008

Although Biden and his Democrat support base may much more closely associate with the style and substance of Obama foreign policy than that of Trump, the world has changed sufficiently to mean that the US cannot simply revert to the Obama-era should Biden win.

Since Obama won office in 2008, China's share of the global economy has more than doubled (without it becoming more democratic), Russian military intervention has extended beyond its neighbours, the withdrawal of US forces from Afghanistan and Iran is closer to completion, large parts of the Middle East and North Africa have gone through a false political 'Spring', and new spheres of geopolitical competition have opened up (eg the control of mobile technology standards, the cross-border regulation of dominant technology companies, territorial control in the South China Sea and in the Arctic, influence and control in multilateral organisations like the IMF, UN, WB, WHO and WTO).

Since the election of Trump in 2016, the "International Liberal Order" (a label that misleads in every word in referring to the post-USSR Cold War multilateral framework for international relations) has been undermined by the country that was one of its chief architects: the unilateral withdrawal of the US from the Iran nuclear deal, the TPP and the Paris climate accord are all examples of this. Post-Trump, countries have cause to doubt the US commitment to any long-term multilateral agreement (over many decades prior to Trump, there are examples of the US changing its commitment to bilateral partners, eg the Shah of Iran after the 1973 oil crises, the Pakistan Army after the fall of the USSR in 1991 and Mubarak in Egypt in 2011 during the Arab Spring).

Since the advent of Covid-19 and the risk of authoritarian abuse of technology and emergency powers, the increases in inequality within and between nation states and awareness of the consequences (if not yet the remedies) of the failure of international coordination have increased.

November 2020 US election: Will Covid-19 derail Trump?

There is still a long way to go and Trump's job approval ratings among registered votes are not very different from a year ago. But an election loss for incumbent President Trump on 3 November no longer looks as remote a possibility as it did during the farce of the Democrat caucus in Iowa in early February and before Covid-19. And, for some, the administration's poor policy response caused over 80,000 deaths and over 30mn job losses.

TPP footnote

After the US withdrawal from TPP in January 2017, the remaining 11 countries negotiated the Comprehensive and Progressive Agreement for TPP (CPTPP, also known as TPP-11), which became effective at the end of 2018 once it was ratified by six of its signatories. The TPP-11 are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. The US would likely require a lengthy negotiation to join TPP (because the agreement was changed after the US withdrawal, changing or suspending 22 provisions, eg on copyright term length, pharmaceutical intellectual property, and technology protection, successfully negotiated under Obama) and a single existing member can veto its admission.

Related reading

Trump's tougher election makes China friction (and EM risks) worse, 4 May 2020

EM Wars: The changing art and risk of war in Emerging and Frontier markets, 6 March 2020

'Westlessness': What it means for investors in EM and FM, 17 February 2020

Trump impeachment or election loss: what would it mean for emerging markets?, 14 October 2019

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Strategy Note / Global

The return of pro-globalisation politics post-coronavirus?

  • The global response to the coronavirus crisis has been uncoordinated, late and incomplete, with potentially catastrophic
  • Will this mark a peak for de-globalisation populist politics (eg anti free-trade and immigration policies)...
  • ...And act as a catalyst for a rebuild of global organisation and coordination of economic and security policies?
Hasnain Malik @ Tellimer Research
12 March 2020
  • The global response to the coronavirus crisis has been uncoordinated, late and incomplete, with potentially catastrophic results in terms of deaths and economic disruption.
  • Will this mark a peak for de-globalisation populist politics (eg anti-free trade and immigration policies, waning support for global governance bodies and fora) and act as a catalyst for a rebuild of global organisation and coordination of economic and security policies?
  • Three examples of how such a shift back to globalisation may begin are the following: 
    1. Poor handling of the crisis in the US could pose an unforeseen challenge to the re-election of US President Trump and the anti-globalisation foreign policy he has championed; 
    2. Iran has already made a request for emergency funding from the IMF and any (geopolitically tinged) reticence by IMF Board members in responding positively may prompt Iran to soften the foreign policies that have led to its ostracisation; and 
    3. Global bodies like the IMF and the WHO are again coming to the fore as necessary parts of a solution to a global crisis.

The world’s health-care and economic policy response to coronavirus has been uncoordinated, late and incomplete. Once (hopefully not if) the disruption from coronavirus fades will it mark the peak for de-globalisation politics and a return to support for international institutions that can manage policy coordination but come at a cost of ceding sovereignty? Or, alternatively, will this episode reinforce all the fears about globalisation, including trade and migration, exploited successfully by populist politicians, and lead to more permanent isolationism? The more severe the disruption from coronavirus, the more likely globalisation stages a comeback.

The answer matters not only for global economic growth but also how future universal threats (the next flash event like a virus, regional war or natural disaster, or existing long-gestation risks like climate change or extreme economic inequality). 

Globalisation also matters for smaller emerging and frontier markets, which generally benefit from a shift to more globalisation (eg greater trade, tourism, remittances, capital flows) more than they suffer (greater vulnerability to hot capital flows, trade sanctions, local high-net-worth capital flight, competition for indigenous sectors and higher cost of compliance with global standards).

We have written in the past about the growth of China as an alternative source of trade and finance in emerging and frontier markets, the US-China trade war, the withdrawal from global coordinating bodies by the US under President Trump, the decline in what has been called (flatteringly) the international liberal order or 'westlessness', the growth of conflict (both military and commodity wars) in the geopolitical space vacated by the erosion of the singular superpower, the universality of the coronavirus threat (there is no hiding place for citizens or investors), and the incomplete coordination of the economic policy response. 

Will the next global trend we discuss be one of greater integration and coordination?

Related reading

Coronavirus – The international policy response, 5 March 2020

Coronavirus: Should it be ignored because it is such an unquantifiable risk?, 25 February 2020

Coronavirus: Commodity prices hit as fears grow more global, 3 February 2020

Coronavirus: UAE case a warning for global tourism, 29 January 2020

Oil war: Saudi, Russia can sustain a long war, but a 35% price drop shortens it, 9 March 2020

EM Wars: The changing art and risk of war in Emerging and Frontier markets, 6 March 2020

'Westlessness': What it means for investors in EM and FM, 17 February 2020

Turkey: Inevitable escalation with Russia-Syria, negative, 28 February 2020

Nigeria: Sahel West Africa violence, minor risk compared with others, 3 March 2020

2020s Vision: Technology disruption and the emerging markets, 5 December 2019

Aramco attack: Saudi, oil and regional insecurity risks raised, 15 September 2019

India, Pakistan: "Air strike" raises tensions, NOT likelihood of hot military conflict, 26 February 2019

Trump impeachment: What it means for Emerging Markets, 19 December 2019

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Strategy Note / Global

Kuwait, GCC: The expat debate stirs again

  • The high share of expatriate residents has long been a populist political issue in the GCC, particularly in Kuwait
  • This debate may be reigniting in Kuwait with Covid-19 and potential stress on public healthcare acting as a catalyst
  • Expats key for GCC non-oil private sector (skills, scale); GCC key for remittance recipients, eg Egypt, Jordan, Pakistan
Hasnain Malik @ Tellimer Research
15 April 2020
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The crisis brought about by the combination of Covid-19 and sustained low prices will test many aspects of the social, political, and economic equilibrium in the GCC. The role of expats could be one such aspect. 

Any deterioration in the environment for GCC expats would be negative for the investment case and for some of the countries from which those expats originate. Equally, those GCC countries which use the crisis to improve the incentives for long-term residency and investment by expats could emerge competitively stronger.

Expatriate residents in the GCC remain key for efforts to diversify economic activity away from hydrocarbons and shrink the role of the public sector. 

In reverse, remittance flows out of the GCC are a material share of GDP (2% to 8%) in a range of recipient countries, eg Bangladesh, Egypt, Jordan, India, Lebanon, Pakistan, Philippines.

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Kurdistan Oil & Gas: New and old risks weigh on bond valuations

Kiti Pantskhava @ Tellimer Research
7 January 2020

If ongoing protests have not been enough to unsettle bond valuations of the Oil & Gas companies operating in Kurdistan, a new round of escalation in the US-Iran relationship should. The main driver of negative sentiment weighing over the sector has been the announcement in December of the delay in payments for the August-September 2018 oil shipments to January 2020. But recent political developments have added a new layer of uncertainty to protest-stricken Baghdad, threatening to destabilise the security situation in the region and increasing geopolitical risks.

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Strategy Note / Global

Oil war: Saudi, Russia can sustain a long war, but a 35% price drop shortens it

  • Both Saudi and Russia have the financial capacity to sustain this war.
  • They also have sufficiently divergent aims for the war to persist.
  • But the collapse in oil price may shorten the length of this war.
Hasnain Malik @ Tellimer Research
9 March 2020
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How long the oil war lasts, following the breakdown of Saudi and Russia cooperation on oil output via OPEC+, depends, like most wars, on: (1) how much pain each side can absorb; and (2) what the goal is for each side. 

Both sides have enough financial capacity and sufficiently divergent goals to sustain the oil price war for some time (quarters, rather than months).

But such a sharp drop in the oil price (down over 35% in a week) may actually shorten the length of this war. 

The sense of trauma for oil exporters (e.g. Saudi and the GCC, Russia, Colombia, Kazakhstan, Nigeria) and hope for relief for importers (e.g. China, India, most of south and south-east Asia, Kenya and Egypt) may prove more fleeting than many assume.

Non-symmetric goals in the oil war

But the goals of each side are not symmetrical. Saudi's aim appears relatively straightforward: bring Russia back into a collusive arrangement on output restraint. 

However, Russia's aim is not so clear: 

(1) Simply maximising its own oil volume and revenue (perhaps not anticipating the severity of Saudi output expansion and subsequent collapse of oil price would have on every oil exporters' revenues, including those of Russia),

(2) Establish its role as the effective swing negotiator of oil price (even if Saudi retains the role of swing producer in physical capacity terms), 

(3) Inflict distress on US shale (which may be a large enough driver of the investment portion of US GDP to offset the benefit of higher consumer spending and may be a large enough portion of the high yield credit market to create a systematic effect), 

(4) Gaining Saudi (and wider GCC) cooperation on geopolitical matters spanning Libya-Syria-Iraq-Iran and on arms purchases.

Financial capacity for an oil war

Saudi fiscal break-even oil price is about US$80, double that of Russia. This suggests Saudi is in a weaker position. And, arguably, Saudi domestic political sensitivity to economic stress is much higher than that of Russia (because of the importance of public project spending and welfare provision).

But with foreign reserves of over US$500bn and further debt-raising capacity, with debt to GDP of merely c25%, this war can be fought for quite some time. 

Saudi could opt to finance a larger fiscal deficit with more debt issuance, particularly in such a low interest rate environment, but with such large reserves it is not essential.

The fallout in EM and FM from the oil war – for exporters and importers

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Vietnam 2020 investment strategy

Tu Vu @ Rong Viet
31 December 2019

In our 145-page strategy report we cover all angles of the Vietnam investment case in 2020. Top-down, we highlight the global and domestic macro drivers, as well as inflows from upcoming index changes as Vietnam becomes a dominant weight in FM indices. Bottom-up, we assess the trends in each sector, while in our stock-by-stock analysis of our entire coverage we provide detailed forecasts, investment rationale and operating risks for the coming year. 

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