Emerging Markets and Consumers

Focus: GLOBAL

Kuen (Scott) Chan Image Kuen (Scott) Chan Contributer and Portfolio Editor, Leeb Group

Our dedicated emerging-market play — Columbia Emerging Markets Consumer ETF (ECON) — has recovered steadily after dropping sharply, along with the sector as a whole, in November following Trump’s election, notes Kuen Chan, contributing editor to The Complete Investor.

Investors had worried that Trump’s protectionist trade policies would hurt emerging economies. Another concern was that his agenda of infrastructure spending and tax cuts would fuel inflation and cause the Fed to raise rates more rapidly, thereby strengthening the dollar.

A strong dollar pulls foreign capital out of emerging economies and into the U.S.; it also makes it harder for overseas borrowers to service their dollar-denominated debt.

And with commodities largely priced in U.S. dollars, it tends to translate into cheaper commodities, shrinking the revenue emerging economies receive for their resources.

Those are legitimate concerns. Emerging economies are expected to incur their fourth consecutive year of net capital outflow in 2017.

A strong rise in the value of the dollar would increase the outflow pressure and make it increasingly hard to pay off dollar-denominated debt.

But while the market has focused on prospects for faster U.S. growth and a stronger dollar, the optimism may have gone too far. Protectionist trade policies could end up hurting the U.S. economy.

In any case, infrastructure spending here will be dwarfed by infrastructure creation in the East as China pursues its ambitious One Belt One Road initiative, which will require massive amounts of energy and materials and create trading networks fostering consumption growth in the East.

So a stronger dollar notwithstanding, we expect emerging economies will continue to propel global economic growth.