In a world of reduced trade everyone loses out, but some lose out more than others.
That's the takeaway from a new report by economists at HSBC Holdings PLC, who say the surge in protectionist measures that's been shrinking global trade volumes is going to hit developing markets and their assets the hardest.
The protectionist policies being advocated in the run-up to the U.S. election are just one manifestation of a surge in anxiety about the outside world that's dragging down efforts to make global trade more open, according to HSBC's Senior Trade Economist Douglas Lippoldt and its Global Head of Asset Allocation, Fredrik Nerbrand. After contributing to the success of isolationist politicians in the U.S., a less open world will also have wide-ranging implications for investors as it stokes inflation and erodes returns on bonds.
Bond yields will rise, but they'll also become more volatile as inflationary pressures grow less predictable. Trade barriers will make it increasingly important to pay attention to idiosyncratic economic and political events, rather than global trends in monetary policy. And economies that depend on exports are going to be in trouble.
"The emerging world is likely to be the main loser from this scenario though as their growth models have largely been structured to cater for growing trade rather than domestic consumption," Lippoldt and Nerbrand say.
Their point is that even though developing markets have been among the most enthusiastic about measures that discriminate in favor of local producers, that may not be serving their interests when a high share of their GDP is geared towards trade.
HSBC's analysis plays on the paradigm of the Fragile Five, a term coined in 2013 by Morgan Stanley analysts to describe five emerging markets whose large external financing needs made them vulnerable to swings in global sentiment. Their theory was borne out, as rising interest rates have helped currencies considered vulnerable by Morgan Stanley to register losses against the U.S. dollar, and eroded bond returns for the vast majority of the group.
Yet HSBC's new report suggests that the problem's inverse — a shrinking current account deficit — is no cure for that vulnerability, when hiding behind a narrowing trade gap is a decline in overall volumes of trade.
As they say, "A more protectionist world is a more volatile one."