Jonathan Toub of Aviva Investors observes that many American companies have already started to transfer part of their production to closer countries after Covid.
If a certain number of American companies transferred part of their production activities to closer countries such as Mexico after Covid, we must not lose sight of the fact that emerging countries are also very intertwined with each other and that the links of these with China remain significant. The coming to power of Donald Trump will certainly help to support inflation. However, we should not expect everything to change overnight just because there is a change of government in the United States, puts Jonathan Toub, fund manager at Aviva Investors, into perspective. An update on the prospects for the United States, emerging markets and what to remember from the recent COP 29 with Jonathan Toub who spoke during a recent visit to Switzerland.
What are the most important developments to consider in relation to equity markets, and more specifically in relation to emerging markets at this time?
Whether on the markets of developed countries or those of emerging countries, the repercussions linked to the result of the American elections in November remain relevant and will certainly continue to be so over the coming months.
Regarding the current macroeconomic context as a whole, one of the most important trends in recent months is the decline in inflation, which has gradually moved closer to the objectives of central banks. Over the last few months, i.e. in August, September, October, GDP growth has been regularly higher than expectations in both the United States and the United Kingdom. Added to this were a number of stimulus measures announced by China in October. Among other industrialized countries, Japan is currently performing quite well.
Overall, the growth outlook for the global economy is rather stable – the soft landing scenario in the United States is not in question. Overall, we expect both higher growth but also slightly higher inflation resulting from the policy direction as outlined by Donald Trump.
“Donald Trump will negotiate with the authorities of other countries to obtain certain advantages but it is not certain that he will apply all the measures he announced during his campaign.”
What aspects will need to be monitored in particular over the coming months?
Among the aspects to watch, services inflation remains relatively stubborn in the United Kingdom. In the United States, political risks and uncertainties related to the new administration which will take office next January will remain a subject of concern. Investors will be particularly sensitive to a potentially more inflationary environment resulting from the implementation of possible new tariff barriers. The rise in interest rates on 10-year government bonds, observed since mid-September, also reflects this situation.
Should we fear a slight increase in inflation due to the imposition of customs duties on goods imported into the United States?
Concerning specific fears linked to the imposition of new customs duties on products imported by the United States, there would be a limit to this policy. Donald Trump promised to tax 60% of products imported from China and around 10% for other countries. However, we must not forget that the imposition of customs duties increases the prices of products purchased by American consumers and production costs for businesses in the United States. This would tend to reduce corporate profits and increase the costs of living across the Atlantic. Furthermore, Donald Trump is what we call a “deal maker” rather than a pure ideologue – even if some people around him are more so. He will negotiate with the authorities of other countries to obtain certain advantages but it is not certain that he will apply all the measures he announced during his campaign.
What about the situation in emerging countries? Could certain emerging countries benefit from the trend towards relocation of part of the activities of multinationals outside China?
The economies of emerging countries often evolve with slightly different trajectories. In Brazil, for example, the central bank began raising its key rates again in September, after having lowered them since the second half of 2023 and until the beginning of this summer.
Regarding the relocation of activities outside China, there are already many American companies that have started to transfer, after Covid, part of their production activities to closer countries such as Mexico. However, we must realize that emerging countries are also very intertwined with each other and that links with China remain important. Chinese automaker BYD is opening major production sites in Brazil, Thailand and Hungary. So, you shouldn’t expect everything to change overnight just because there is a change of government in the United States.
“Chinese automaker BYD is opening major production sites in Brazil, Thailand and Hungary.”
When it comes to relocating activities outside China, several Asian countries such as Indonesia, Thailand and Viet-Nam have many advantages to offer, notably thanks to lower labor costs, and these countries will certainly benefit from the search for diversification of production activities between several countries.
Likewise, South Korea, which is one of the main allies of the United States in the region, is among the main exporters of products to the American market, and is expected to benefit from this trend.
There has been a lot of talk about the fight against climate change, and more broadly about sustainability, in recent weeks. Is this a concern primarily for companies in developed countries or is this dimension also taken into account more in emerging countries?
Of course, developed countries, and Europe in particular, are more advanced in this area and many companies in industrialized countries have implemented practices that integrate sustainability throughout their production chain. Now, sustainability is a long journey that is never completed.
Concerning the United States, there are currently fears that the return of Donald Trump could call into question the progress made in recent years. However, we must not forget that several of the most economically important American states are still in Democratic hands. Moreover, American multinationals are precisely active globally – they might not change their practices simply because a new president has been elected. In addition, groups operating in a truly global manner also apply global reporting for all of their activities, regardless of whether a site is located in the United States, Europe or Asia. This is the case for the use of energy, in terms of work rules, etc.
“Much of the heavy lifting in terms of financing the transition will have to come from mobilizing private sources rather than public sources.”
For our part, our engagement with the companies in which we invest is truly global with a holistic approach. We are increasingly focusing much of our analytical work on supply chain management. We also take into account whether the companies in which we invest participate in structures such as the Taskforce on Nature-related Financial Disclosure (TNFD), which has developed recommendations for the assessment, management and reporting of risks. linked to nature.
The same goes for the Science Based Targets Network (SBTN), which advocates for science-based targets for nature. Groups like Holcim, GSK or Kering which were the first to define ambitious objectives in this framework over the last month.
What do you think of the results, or lack of results, of the recent COP 29 which has just ended? What lessons can we learn from this in terms of sustainable investment?
COP29 ended with a new funding target, but at $300 billion per year by 2035, it falls far short of the $1.3 trillion target and once again demonstrates the gap that exists between the expectations of developed countries and those of developing countries. The final agreement contains text that aims to define a trajectory to reach $1.3 trillion per year in climate finance, but it takes into account all sources of financing, including the private sector. This highlights the trends we saw emerging from the nature-related COP 16 in Colombia, in which it is increasingly clear that much of the heavy lifting in terms of financing the transition will have to come from mobilizing from private sources rather than public sources. Another more positive outcome was the finalization of the rules for the carbon market, which allows the creation of the first “official” carbon credits supported by the United Nations and should help to establish the credibility of this market and support its growth.
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