Trade war fears hit emerging markets

INVESTORS PAY HEED AS US PREPARES FOR LONG-DRAWN BATTLE

Some of the world’s largest money managers soured on emerging markets as compounding trade threats deepened the worst monthly rout for developing currencies since the US election.

Goldman Sachs said it’s reducing an overweight position in developing-nation currencies, preferring a more “defensive” stance as China and Europe warned the escalating trade war could trigger a global recession. Citigroup cautioned that investment flows into emerging-market assets will subside, while Morgan Stanley lowered its recommendation toward the asset class, citing the risk of a stronger US dollar and ballooning trade threats.

Investors are increasingly paying heed as the US digs in. After a flurry of tit-for-tat tariffs, Washington is mulling a new front by potentially ratcheting up scrutiny of Chinese investments, according to people familiar with the plans. Outflows from US-listed exchangetraded funds that invest across developing nations, as well as those targeting specific countries, hit $3.38 billion last week, the most in more than a year. The implications are familiar. “A significant slowdown in trade would materially deteriorate the global growth outlook with repercussions for risky assets,” Elia Lattuga, a crossasset strategist at UniCredit Bank, said. Emerging markets would be “especially exposed,” he said.

While there’s no clear resolution to the fiery rhetoric, some money managers are more optimistic. UBS Global Wealth Management, which reduced its weighting on emerging-market equities to neutral, said trade risks should wane in coming months and help support a double-digit rally.

There’s limited downside risk to “already very cheap” developing-nation currencies as any nasty surprises from Donald Trump would only prompt a “temporary and very bittersweet sugar high for the greenback,” according to Ashmore Group Plc.

Most major developingnation currencies weakened against the dollar on Tuesday, with MSCI Inc’s gauge trading down for a second day.

AP ■ An electronic board at a brokerage in Beijing. Chinese equities entered a bear market yesterday on concern about the country’s ability to fight a trade war.