Macro Risk In Emerging Markets Is Too Real

If ever any investor needed a real time lesson in emerging markets risk, the timebombs in Ankara, Jakarta and Bogotá to provided it. President Erdogan ordered the arrest of his top rival Istanbul Mayor Ekrem İmamoğlu and triggered a 10% plunge in the lira against the US dollar, an exodus of offshore money from the local T-bill market and a horrific meltdown in Istanbul bank shares.

Indonesian equities also had a 7% plunge on news that Fin Min Sri Indrani had resigned after President Subianto dissed fiscal discipline and tried to muscle in on the central bank's political independence.

Thankfully, my strategy to buy Indian bank ADRs once the RBI delivered a 25 basis point rate cut, injected liquidity in the money market and reduced the regulatory burden on banks proved highly profitable. HDB and IBN in New York both surged 12-15% on the NYSE in a mere week. All is not hunky-dory in the dark alleys of the world on the eve of Liberation Day.

A spasm of US stagflation amid a trade war is an unmitigated disaster for emerging markets as it means that the Federal Reserve will not rush to slash interest rate at the first sign of a US economic growth wobble. Nothing is more calculated to crush animal spirits in the global financial village than a spike in the Business Uncertainty Index to its highest level since Covid swept the world in March 2020.

Trump's reciprocal tariffs (the Big One) are the biggest threat to the global trading network ever unleashed by an American President since the Smoot-Hawley Tariff amplified the Great Depression in the 1930's. Even US allies like India, which has one of the highest protectionist walls in the emerging markets as a residue of the late, unlamented License Raj will not escape the deflation chill of Trumponomics. For example, 16% of American aluminium imports originate from the GCC and are now subject to a 25% tax.

Trump's systemic threat to global trade is also a disaster for port operators, air freight carriers, container shipping firms and logistics networks in the GCC/MENA at a time when the fragile geopolitics of Syria, Gaza, Yemen and Baluchistan have been hit by kinetic warfare. I even wonder why Trump is bothering to attack the Houthi terrorists in the Red Sea since their missile and drone attacks on container shipping served to strangle world trade, exactly as his tariffs do.

In any case, the Houthi attacks damage China-EU trade and increase the attraction of American Gulf Coast LNG tanker cargoes over Qatari LNG, both policy objectives of the Trump White House, who the Houthis are inadvertently helping with their mayhem in the Red Sea. Pay to play Sisi or Trump may grab the Suez Canal since the American taxpayer has shelled out $60 billion since Camp David.

Also published on Medium .

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