In­vestors flee emerg­ing mar­kets af­ter Trump win

Kuwait Times - - BUSINESS -

In­vest­ing in Mex­ico, China and other emerg­ing mar­kets has never been for the faint­hearted. Big swings have been a hall­mark, caused by ev­ery­thing from the 1994 “tequila cri­sis” where Mex­ico de­val­ued the peso to Rus­sia’s de­fault on its debt in 1998. Here’s the lat­est ad­di­tion to the list: Don­ald Trump’s vic­tory on Tues­day, which some an­a­lysts are call­ing an “or­ange swan” event for emerg­ing mar­kets. Trump’s elec­tion was un­ex­pected, and in­vestors were un­pre­pared for it - the kind of event that econ­o­mists liken to see­ing a black swan for the first time - and it has caused stock mar­kets to tum­ble from Mex­ico City to Seoul. As in­vestors try to piece to­gether what a Trump pres­i­dency will mean for stocks, a grow­ing con­sen­sus is that emerg­ing mar­kets will be some of the big­gest losers, at least in the short term.

Funds de­voted to emerg­ing mar­ket­stocks tum­bled af­ter the elec­tion, even while stocks in the United States were surg­ing. The largest ex­change-traded fund that tracks emerg­ing-mar­ket stocks sank 2.6 per­cent Wed­nes­day, when the S&P 500 in­dex of US stocks jumped 1.1 per­cent. Van­guard’s FTSE Emerg­ing Mar­kets ETF fell an­other 2.9 per­cent Thurs­day, while the S&P 500 added 0.2 per­cent.

The fear cours­ing through emerg­ing mar­kets is that Trump will fol­low through on his rhetoric from the cam­paign. More open trad­ing rules kept fac­to­ries whirring in Mex­ico, China and other emerg­ing mar­kets, and the re­sult­ing growth helped those coun­tries build up their own mid­dle classes, which cre­ated more new cus­tomers for com­pa­nies in emerg­ing mar­kets and else­where. But Trump has talked about pulling back from trade deals. That’s why ex­port-heavy emerg­ing mar­kets have seen some of the big­gest de­clines re­cently. South Korean stocks lost 3.5 per­cent on Wed­nes­day in dol­lar terms, and Tai­wanese stocks fell 3.1 per­cent, ac­cord­ing to MSCI in­dexes. The US is Mex­ico’s largest trad­ing part­ner, so trade re­stric­tions would hurt it as well. It faces ad­di­tional pres­sure from Trump’s calls to build a wall along Mex­ico’s bor­der - at its ex­pense - and for the de­por­ta­tion of im­mi­grants liv­ing in the US il­le­gally. That could cut off a lot of re­mit­tance pay­ments headed back to Mex­ico from work­ers in the US Mex­i­can stocks lost 9 per­cent in dol­lar terms Wed­nes­day.

Be­sides the pos­si­bil­ity of a trade war, emerg­ing-mar­ket in­vestors are also wor­ry­ing about the ram­i­fi­ca­tions of a stronger dol­lar and higher US in­ter­est rates that could arise from a Trump pres­i­dency.

Weaker emerg­ing-mar­ket cur­ren­cies hurt in­vestors count­ing their re­turns in US dol­lars be­cause they make each rand’s worth of South African stock worth fewer dol­lars. And the rand has lost more than 5 per­cent of its value against the dol­lar since elec­tion day. The Mex­i­can peso is at a record low.

A stronger dol­lar also adds pres­sure on emerg­ing-mar­ket cen­tral banks to raise in­ter­est rates to sup­port their fal­ter­ing cur­ren­cies. It at least gives them pause if they want to cut rates in hopes of boost­ing their economies. The big losses in re­cent days are a sharp turn­around from ear­lier this year, when emerg­ing-mar­ket funds were among the hottest in­vest­ments. The Van­guard FTSE Emerg­ing Mar­kets ETF re­turned more than 19 per­cent through early Septem­ber, for ex­am­ple, and in­vestors poured $18.4 bil­lion into emerg­ing-mar­ket stock mutual funds and ETFs dur­ing the first eight months of the year. But the re­cent strug­gles are also just the lat­est turn in the whiplash love­hate cy­cle that in­vestors have had with emerg­ing mar­kets. Stocks from de­vel­op­ing economies are among the riski­est in­vest­ments to own, and they have of­ten fol­lowed up big gains with big losses.

Of course, the re­cent losses come with the big caveat that a Pres­i­dent Trump may not be able to fol­low through on all his cam­paign rhetoric. Many Repub­li­cans still say they sup­port the idea of free trade, for ex­am­ple. That high de­gree of un­cer­tainty is one rea­son why Wasif Latif, head of multi-global as­sets at USAA, sug­gests in­vestors take a breath and hold steady de­spite the tu­mult. He’s not par­ing back on the emerg­ing-mar­ket in­vest­ments held in the mutual funds he over­sees, in­clud­ing tar­get-date retirement funds. Emerg­ing-mar­ket stocks looked to be some of cheap­est in the world, based on their prices rel­a­tive to their earn­ings, and the re­cent de­clines make them look only cheaper. “The mar­kets some­times dis­count things too much, too quickly, at the Nth de­gree, and usu­ally what ends up hap­pen­ing is the re­al­ity is some­where in be­tween,” Latif says. “We are not jump­ing to con­clu­sions about what’s hap­pen­ing, and I think we need to take a slower, wait-and-see ap­proach to see what the poli­cies are. Then, we’ll know what the real im­pacts are.” —AP

NEW YORK: A sign for Wall Street out­side the New York Stock Ex­change. Global stocks were mixed on Fri­day and the dol­lar stead­ied, as in­vestors sought greater clar­ity on the up­com­ing economic poli­cies of Pres­i­dent-elect Don­ald Trump. —AP

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