Following the U.S. election, the dollar strengthened against many currencies while emerging markets experienced periods of tightening liquidity and volatility. Richard Lawrence, Senior Vice President, Portfolio Management at Brandywine Global Investment Management, says the emerging market selloff is a knee-jerk reaction to the election results.
Lawrence said, “We still like what we are seeing in emerging markets, particularly as crude prices continue to stabilise, their current account deficits improve, along with their terms of trade. We believe the rise in protectionist sentiment has recently driven emerging market asset valuations lower; however, protectionism will not likely translate into economic growth. Mexico has been at the epicenter of the post-election selloff. If you listened to candidate Trump during his campaign, you would think that the North American Trade Agreement was a unilateral deal with an endless supply of Mexican goods coming into the U.S., but that is not true.”
“The U.S. exported $230 billion of goods to Mexico last year and it still remains the number one or number two export market across 21 states.”
“We have already seen some of President-elect Trump’s rhetoric on Mexico soften and think this will continue. We believe the whole discussion around Mexico may be instead focused on security. Does that mean a wall is going to get built? I think the wall is a metaphor for greater border security. Our view is that candidate Trump took a very hard line on a number of different issues and he is now walking them back, as he may also do regarding his initial position on trade. We are waiting for information on his actual policies once in office rather than taking campaign promises at face value, which is why we have not made any significant adjustments to our emerging market positions.”
The Global Fixed Income team at Brandywine Global is not overly concerned with an imminent emerging market crisis since there are some significant differences between emerging markets in the past relative to where they are today.
Lawrence points to the substantial foreign-exchange reserves that many emerging markets have built up. He continued, “Compared to the late 90s, we have seen a massive buildup of foreign-exchange reserves into the trillions, which has given emerging markets the ability to defend their currencies.”
“Prior emerging market crises were exacerbated by fixed currency regimes, where these currencies were pegged to the U.S. dollar rather than floating rates. The fact that most emerging market currencies are free floating these days means they can act as the shock absorber by going through the depreciation process. In effect that is what happened at the end of the commodity cycle from 2011 through the start of this year. Emerging market currency valuations adjusted lower, acting as the shock absorbers.”
“Our view on the dollar is that there is potential for it to appreciate by 5-10% from here. Oftentimes, when investors talk about dollar appreciation they tend to think about the dollar spot index. All the headlines are about dollar appreciation but we think the dollar spot index is all about relative performance against the major currencies—the euro, yen, sterling, the Swiss franc, and Swedish krona.”
“When Brandywine Global thinks about the dollar and its potential to appreciate or depreciate, we tend to do that on a more trade-weighted basis. In our view, the dollar could continue to appreciate against some of the majors but perhaps not as much against some emerging market currencies, which we believe are already mispriced against the dollar,” noted Lawrence.
About Legg Mason
Legg Mason is one of the world’s largest funds management groups, with a history that dates back to 1899. The firm is listed on the New York Stock Exchange and employs approximately 3,100 employees in 31 offices worldwide.
One of Legg Mason’s most distinguishing characteristics is its global multi-affiliate model. Legg Mason provides a global platform and centralised business and distribution support for its nine affiliated fund managers that include: Brandywine, Clarion Partners, Clearbridge, EntrustPermal, Martin Currie, RARE (in addition to its own domestic distribution), Royce & Associates, QS Investors and Western Asset. Each affiliate operates independently under its own brand and investment process, and is considered an industry expert in its asset class.
Legg Mason offers a diverse set of investment solutions across institutional, wealth management and direct investor channels, covering a range of asset classes including Australian equities, global equities, fixed income, real assets, income, alternatives, emerging markets, direct lending and multi-asset products.
About Brandywine Global
Brandywine Global Investment Management, LLC (“Brandywine Global”) offers a broad array of fixed income, equity, alternatives, and asset allocation strategies that seek value across global markets.
Founded in 1986 the firm has been a wholly owned, independently operated affiliate of Legg Mason, Inc. since 1998. The firm manages approximately $70 billion as of September 30, 2016, for a primarily institutional client base, with headquarters in Philadelphia and office locations in San Francisco, Montreal¹, Toronto¹, Singapore², and London³.
© 2016 Brandywine Global Investment Management, LLC
All investments involve risk. Equity securities are subject to price fluctuation and possible loss of principal. Past performance is no guarantee of future results.
¹Brandywine Global Invest Management (Canada), ULC
²Brandywine Global Investment Management (Asia) Pte. Ltd
³Brandywine Global Investment Management (Europe)
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