By Charles Robertson
THUR, 05 NOV, 2020-theGBJournal- After yesterday’s nerves, I expect Biden to clinch victory this evening (London time) with Nevada due to give him 6 Electoral College votes after 5pm London time. Georgia is also looking like another Democrat victory (Biden is 23k votes behind with 2% of the vote, about 100k, still to be done and they’ve been flowing his way).
This gives him 270 Electoral College votes with Nevada, which is what he needs to win, and 286 if he does get Georgia. With Pennsylvania votes counted tomorrow – and Democrats expecting a big win from remaining mail-in votes, Biden might well end up with 309 electoral college votes to 229 for Trump (who is likely to win North Carolina). If that happens, your kids won’t understand why you ever thought this election race was tight.
Talk of recounts in Wisconsin have been dismissed by a former Republican governor Scott Walker as having no chance of changing the results – previous recounts have changed voting tallies by a max 300 votes but Biden is 20,000 ahead.
Even if challenges in any states get to Supreme Court, I suspect that Trump will find that his appointees .. like Powell at the Fed .. don’t owe him a personal favour to come down on this side. They will instead do what is institutionally correct. It would be surprising if there were so many successful challenges that Trump could keep the presidency.
So our base conclusion from May, that Trump would lose because that’s what always happens to incumbents in a recession year, will come good. Am I 100% certain on this .. no, not after yesterday’s nerves, but I’m 80% confident. Interestingly, this also suggests that providing Biden can and does run again in 2024, he will win unless there’s a recession in 2023-24. I’d assume he will face a Republican controlled Congress at some point though.
Outlook for EM
We argued in May, Trump’s defeat is good for EM and CIOs will start re-allocating cash to EM in a big way. Yesterday, Blackrock’s head of fixed income, who is responsible for $2.6 trillion of that firm’s $7.8 trillion in assets (Africa’s GDP is $2 trillion to put this into perspective), says they have gone overweight EM. The stock of Africa’s Eurobonds only topped $100bn in 2018, and even if it is only Blackrock’s actively managed part of the business .. more like $2 trn in all asset classes (perhaps $700bn in fixed income), that starts to shift to EM .. this could be very helpful.
Our base case is that FDI will stop being a net positive for the US due to Trump’s defeat, and portfolio flows will also go to EM, and together these will drive the $ gradually weaker in coming years. This becomes a self-reinforcing cycle of EM FX appreciation giving good returns to $ investors, which in turn attracts more money to EM and in turn pushes EM FX stronger. Note though that I doubt FDI will be a big driver of this in 2021 .. that may be more of a 2022 story once the global economy is back on its feet.
For equities, ETF inflows are likely to benefit everyone of course, but for active managers, SA is likely to be the biggest beneficiary in the EEMEA space:
Investors will worry about the Russia sanction risk we flagged on 1 October – although assuming the Republicans keep the Senate maybe this will reduce that risk. Does anyone have thoughts on that?
Turkey is virtually un-investable although the extremely cheap TRY is tempting.
Gulf countries currency pegs to the dollar make them a little less attractive if we assume the dollar will gently depreciate.
Central Europe/Greece are interesting after the virus subsides (see below).
SA is the big liquid available market to take a position in which should benefit from ZAR appreciation (an EM bellwether currency after all). A stronger rand – my ZAR16 end-2020 target is already met and ZAR15 or better is possible in 2021 – could keep interest rates low. The yield curve is profitable for banks.
Latest lockdown news
2 months ago we warned that virus trends were worsening in Europe and that in EM, central Europe/Greece were mostly likely to be negatively impacted. Both because they are open economies that export to the rest of the EU and because of their own virus trends. Greece is re-entering full lockdown tomorrow.
Meanwhile Pakistan has said it will not re-enter lockdown and Kenya has decided to extend a curfew despite rising cases, and not do lockdown. Our point since May is that low income EM will not do lockdown again because the trade off between lives lost and GDP is not worth it, particularly when lockdowns were not that effective.
So while low income EM will be impacted by lower exports to the EU for example, their domestic demand stories will do better. October cement sales rose 15% YoY in Pakistan to hit a record high and that’s the sort of positive story that can continue.
Turkey and Egypt are likely to – at worst – do curfews, rather than lockdown. SA should not be in danger of tighter restrictions until their autumn around Feb/March 2021 (when vaccines might start to be available).
So – while the global economy does have double dip worries – and are likely in the EU, domestic demand in EM looks better.
The big risk case for EM in 1Q21 is that the virus gets out of control in China, Korea, Taiwan and Thailand – which accounts for 70% of MSCI EM. There is no reason to believe that will happen given their success to date.
CONCLUSION: Buy EM.
Charles Robertson is chief economist, Renaissance Capital author Fastest Billion
Twitter-@theGBJournal|email: info@govandbusinessjournal.com.ng
