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Investors are bracing for trade tariffs proposed by President-elect Donald Trump and are cutting out emerging market stocks to counter a strong U.S. dollar and rising bond yields.
MSCI’s Emerging Markets Index, which tracks about $7.6 trillion in stocks from China, India, Brazil, South Africa and other markets, has fallen more than 10% since hitting a 2-1/2-year high on Oct. 2. are. The market stock price has been almost flat during this period.
In addition to already strong economies, emerging markets are experiencing inflationary policies such as tariffs and tax cuts under President Trump, and the US Federal Reserve has been raising interest rates for a longer period of time than previously expected. He has been hit hard by the prospect that he may be forced to continue. U.S. Treasury yields have risen sharply in recent weeks as traders reassess the outlook for inflation.
“You can clearly see this with the rise in US yields and the strength of the US dollar…This is definitely an environment in which emerging markets can perform,” said Emre Akkakmak, portfolio consultant at emerging market fund manager East Capital. “The main market is two-thirds of the market,” he said. [MSCI] All indices are under pressure. ”
Chinese stocks, which make up the largest share of the index, have fallen 15% since Oct. 2 on concerns about the health of the country’s economy. Other emerging market powerhouses India and South Korea have also suffered significant losses in recent months.
Investors have withdrawn about $3 billion from global emerging market equity funds so far this year, compared with $31 billion in outflows last year, according to JPMorgan data.
When U.S. interest rates rise and the dollar remains strong for an extended period of time, U.S. investors typically tend to stay at home rather than take risks overseas.
Investors now expect countries will seek to weaken their currencies and make exports more competitive in response to U.S. tariffs, a move that will depress dollar earnings in emerging markets. There is.
“The consensus is that protectionism is getting worse and America first is the only way to go,” said Archie Hart, emerging market equity portfolio manager at NinetyOne. But he added that markets had already priced in rough trade relations for years.
Some investors believe that tariffs will initially be set higher than Wall Street consensus but will be lowered once President Trump strikes a deal, leading to a decline in overall emerging market assets in the first half of the year, followed by a rebound. I am of the view that this is the case. with individual countries.
“What we’re seeing right now is a very emotional and irrational reaction that creates a historic buying opportunity,” said Christina Hooper, chief global market strategist at Invesco.
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However, other investors remain reluctant to dive into emerging markets again. This means that unless Chinese stocks are excluded from the index, exposure to Chinese stocks will potentially increase, potentially overshadowing developments in other countries.
Those concerns were highlighted last week when the stock price of social media and gaming giant Tencent plunged after the company was designated by the Pentagon for suspected ties to the Chinese military. The company makes up about 4% of the MSCI index, about the same weight as Brazilian stocks in the overall benchmark.
“For many people, China just became a pariah. It was uninvestable,” said Mark McCormick, head of foreign exchange and emerging markets strategy at TD Securities.
