Strengthening dollar and rising tariffs to disrupt emerging markets' equilibrium: Jahangir Aziz

"All forms of tariff increases, it has never been the case that you have had a tariff increase and trade has actually benefited, trade slows. Therefore, all emerging markets on average necessarily will have to get hit if you are going to have a tariff increase," says Jahangir Aziz, JPMorgan.

How do you make sense of firstly this Trump rally and what it is doing to various asset classes across currencies and even Bitcoin?
Jahangir Aziz: So, if you look at the Trump rally, it sort of look at the three different markets, equities and rates and FX. I think the equity market is clearly reflecting the view that in a Trump era you are going to get a significant amount of deregulation, not just on big techs but also on banks. At the same time, you are going to get the promised rate cuts that he had done in the campaign. So, it is not just that you are going to get the 2017 tax cuts, the TCGA tax cuts being extended. In addition to that, you might even get corporate tax cuts, which obviously raises the fiscal deficit, raises the debt. And if you look at the rates market, the rates market is reacting, exactly taking the same cues, saying that, look, going forward with the red sweep chances are that not only will we get the 2017 TCGA tax cuts to be extended fully, in addition to that you could even get corporate tax cuts which would again raise the deficit and therefore there is an issuance problem up ahead and that is what the rate markets is looking at.

At the same time, there are questions about tariffs and questions about immigration. Both of them are inflationary. So, there are concerns that the Fed may not be able to take down neutral rate to three.


It gets topped out beforehand. So, even the short is moving up and the dollar is obviously strengthening on concerns about tariffs being imposed and rates being much higher than, let us say, ECB rates and both the interest rate differential, as well as concerns about tariffs and US exceptionalism driven by promises of deregulation, promises of higher fiscal deficit, that is essentially is driving your FX market. On Bitcoins, I shall not make a comment. I never understood Bitcoins. I still do not.


How does one know from, I mean I am talking about really financial investors here, that there is still some more meat left in this Trump rally or this Trump rally has already reached its climax?
Jahangir Aziz: That is hard to say. That is hard to say because, look, we do not know the details. So, we do not know the specifics, neither do we know the timing of the proposed policy changes, whether it is on trade, whether it is on immigration, whether it is on fiscal policy or on regulations.

We do not know that. All we know and we try to guess by looking at the appointments is the direction of the change. Now, the direction of the change is higher tariffs. It is that restrictions on immigration and there will be more deregulation and higher fiscal deficit for the US. But without the specifics being brought down, all of us will have our own views about where things are going to go.

So, I do not think you can look at a variable or two variables and say, this is telling you that the Trump rally is over, this is telling you that the rates have peaked out. There is a sense in the market that there is going to be incremental changes in policies, incremental changes in tariffs, incremental changes in immigration policy which are the first two things that are most likely to happen.

Fiscal policy regulations might take a longer time. We could all be surprised that it is not the case that these things are going to move in incremental fashion. The new administration to come in January 20th with a barrage of executive orders on trade, which could move this incremental view to a much more extreme, sharp change view and I think that the market will have to assess that.



So, just when everything was looking great for India, now we have to deal with global, I would not say headwinds, but I would say uncertainty, the strength in dollar, high tariffs. Could this change the equilibrium for India and for emerging markets or markets overreacting?
Jahangir Aziz: Almost definitely it will change. Trade is the lifeblood of emerging markets. You can look at any country including India, let us take India's investment to GDP ratio. We keep on talking about public sectors doing this and the private sector is doing that and that India is a domestic market. Here is something that you can do. You look at investment to GDP ratio and you look at exports to GDP ratio, there is no daylight between those two lines. The point I am trying to make is that even in one of the most closed emerging markets like India, trade is the lifeblood of emerging markets.

All forms of tariff increases, it has never been the case that you have had a tariff increase and trade has actually benefited, trade slows. Therefore, all emerging markets or emerging markets on average necessarily will have to get hit if you are going to have a tariff increase. That has been the case ordained by Adam Smith. Since 300 years, it has not changed very much. It is unlikely to change now. All I am saying is that, look, you increase in tariffs anywhere in the world reduces trade and if trade goes down, emerging markets go down. It does not matter which emerging market you are trying to look at.

Now, you can say, well, some countries might benefit, others would not benefit, that you can make the argument but these are relative benefits. These are not things that will put emerging markets whether it is India or China or Brazil or any country on a higher medium-term growth path. It does not.