Emerging investors eye trade, geopolitics in U.S. race

By Peter Apps - Analysis

LONDON (Reuters) - European emerging markets investors may have to brace for a rise in trade protectionism or geopolitical risk depending on who wins this year's race for the White House, sector analysts and fund managers say.

Money managers say they may have to factor in higher oil prices and Middle East tensions if Republican John McCain wins, or tougher international trade conditions if Democrat Barack Obama comes out ahead in November.

But with both party conventions just around the corner, they are still looking for more clarity on what the candidates actually propose.

"It's something we've been talking about although it's not something we have taken any investment decisions on yet," said Jason Hepner, investment director for global strategy at Standard Life in Edinburgh, who helps manage $3 billion in emerging assets.

"It's difficult to tell what an Obama administration would actually mean. If you had protectionism with manufactured goods that would affect countries such as China most but if you had agricultural goods protectionism that would be more damaging to Latin America."

The two candidates are seen offering a sharp contrast on trade. McCain has voiced unreserved support for free trade deals while Obama argues labor and environmental concerns must come first.

"Obama is clearly seen as more protectionist, and that would definitely be a negative for emerging markets," said Millennium Global strategist Claire Dissaux.

But Hepner said worries over protectionism had to be balanced against the potential for a rise in geopolitical tensions under McCain, particularly with Iran, possibly ushering in higher oil prices that might dent growth.

A Reuters/Zogby poll on Wednesday showed the Republican candidate opening up a 5-point lead on Obama, helped by the belief that he would be a stronger manager of the economy.

OIL HIGHER?

"McCain would be seen as more hardline in terms of foreign policy particularly regards the Middle East," he said.

"You might expect to have a lower oil price with Obama in the longer term and the question will be whether that would offset any protectionism."

On that assumption, a McCain presidency with higher oil prices could benefit Gulf and other oil producers.

Relatively wide current account deficits in South Africa and Turkey, amongst others, have meant they suffered more from higher energy costs this year and a drop in global risk appetite.

But some analysts say increased risk aversion could benefit the EU's fast-growing Central European economies, where currencies like the Czech crown and Polish zloty have been treated as safe havens this year.  Continued...