Emerging market stocks slide on Trump tariff threats and strong dollar

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Investors are shunning emerging market stocks as they grapple with President-elect Donald Trump’s proposed trade tariffs and a stronger U.S. dollar and rising bond yields.

MSCI’s Emerging markets The index, which tracks about $7.6 trillion in stocks across China, India, Brazil, South Africa and other markets, has fallen more than 10 percent since hitting a two-and-a-half-year high on Oct. 2. Developed market stocks are fairly flat over that period.

Inflationary policies such as tariffs and tax cuts under Trump have put emerging markets bets on top of an already buoyant the economyThat would force the Federal Reserve to hold interest rates much longer than previously expected. U.S. government bond yields have risen in recent weeks as traders reassessed their outlook for inflation.

“This is evident in rising US yields and the strength of the US dollar. . . “It’s definitely not an environment for emerging markets,” said Emre Akkamak, portfolio consultant at emerging markets fund manager East Capital, adding that “major markets account for two-thirds of that.” [MSCI] All indices are under pressure.”

Chinese stocks, which make up the largest portion of the index, have fallen 15 percent since Oct. 2 on concerns about the health of the country’s economy. India and South Korea, two other emerging market heavyweights, have also sustained steep losses in recent months.

Investors have pulled nearly $3 billion from global emerging market equity funds so far this year, up from $31 billion last year, according to JPMorgan data.

A long period of high US rates and a strong dollar usually entices US investors to stay at home rather than take more risks abroad.

Investors are now betting that countries will try to weaken their own currencies and make their exports more competitive in response to U.S. tariffs, a move that would erode emerging market dollar earnings.

“There’s a consensus case that protectionism gets worse and America first is the only way out,” said Archie Hart, emerging market equity portfolio manager at Ninety One. However, he added that markets have already priced in years of stormy trade relations.

Some investors are positioning for a sell-off across emerging market assets in the first half of the year, followed by a rebound, betting that tariffs will initially be set higher than the Wall Street consensus, only to be reduced by Trump’s deal blow. with individual countries.

“Right now, what we’re seeing is a very emotional, irrational response and that has historically created buying opportunities,” said Christina Hooper, chief global market strategist at Invesco.

However, other investors are still reluctant to return to emerging markets because it means a large underlying exposure to Chinese stocks, unless they screen them out of the index, which could overshadow movements in other countries.

Those concerns were underlined last week when shares of social media and gaming giant Tencent fell sharply after being named by the Pentagon over alleged Chinese military ties. The company accounts for about 4 percent of the MSCI index, or the full weight of the benchmark for Brazilian stocks.

“China has just become, to many people, a bit alien; It’s become uninvestable,” said Mark McCormick, head of foreign exchange and emerging market strategy at TD Securities.