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Investors are dumping emerging market stocks as they brace for trade tariffs proposed by President-elect Donald Trump and deal with a stronger US dollar and rising bond yields.
MSCI index Emerging markets The index, which tracks nearly $7.6 trillion in stocks across China, India, Brazil, South Africa and other markets, has fallen more than 10 percent since reaching its highest level in two-and-a-half years on October 2. Almost flat during that period.
Emerging markets have been hurt by bets that inflationary policies such as tariffs and tax cuts under Trump, on top of already booming growth, will… economyIt will force the Fed to keep interest rates high for much longer than previously expected. US government bond yields have risen in recent weeks as traders reassess their expectations for inflation.
“It is clear with the rise in US bond yields and the strength of the US dollar… “This is definitely not an appropriate environment for emerging markets to perform,” said Emre Akcakmak, portfolio advisor at East Capital Emerging Markets Fund Management, adding that “the major markets, which represent two-thirds of the MSCI “They are all under pressure.”
Chinese stocks, which make up the largest share of the index, have fallen 15 percent since October 2 due to concerns about the health of the country's economy. India and South Korea, two emerging market heavyweights, also suffered sharp losses in recent months.
Investors have withdrawn about $3 billion from global emerging market equity funds so far this year, in addition to $31 billion in outflows last year, according to JP Morgan data.
Longer periods of higher US interest rates and a strong dollar typically tempt US investors to stay home rather than take on more risk investing abroad.
Investors are now betting that countries will try to weaken their currencies and make their exports more competitive in response to US tariffs, a move that would lead to lower dollar gains in emerging markets.
“There is a consensus that protectionism is getting worse and that America first is the only way to go,” said Archie Hart, emerging market equity portfolio manager at Ninety One. But he added that markets had already been reckoning with troubled trade relations for years.
Some investors are bracing for a broad sell-off in emerging market assets in the first half of the year, followed by a rebound, in a bet that tariffs will initially be set higher than the Wall Street consensus, only to be reduced as Trump strikes deals. With individual countries.
“Right now, what we're seeing is a very emotional and irrational reaction, and that has historically created buying opportunities,” said Christina Huber, chief global markets strategist at Invesco.
However, other investors remain reluctant to return to emerging markets since that would mean significant underlying exposure to Chinese stocks, unless they screen them outside the indexes, which could overshadow moves in other countries.
Those fears were confirmed last week when shares of social media and gaming giant Tencent fell sharply after the Pentagon designated it as having alleged Chinese military ties. The company represents about 4 percent of the MSCI index, or almost the entire weight of the benchmark index of Brazilian stocks.
For many people, China has become somewhat of a pariah; “It was uninvestable,” said Mark McCormick, head of foreign exchange and emerging markets strategy at TD Securities.
