Emerging market currencies slide on Trump’s tariff threats and a stronger dollar

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Investors are abandoning emerging markets as they brace for trade tariffs proposed by president-elect Donald Trump and grapple with a rising U.S. dollar and rising bond yields.

Figure MSCI emerging markets The index, which tracks about $7.6tn 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 October 2. Advanced markets are relatively flat at that time.

Emerging markets have been hit by bets that inflationary policies such as tariffs and tax cuts under Trump, on top of already strong ones. the economywill force the Federal Reserve to keep interest rates higher for longer than previously expected. US government yields have risen sharply in recent weeks as traders assess their outlook for inflation.

“It is clear that American products are rising and the strength of the United States dollar. . . this is not a place for emerging markets to work,” said Emre Akcakmak, portfolio consultant at emerging markets fund manager East Capital, adding “major markets account for the second half of three of the (MSCI) index are all under pressure” .

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

Investors have pulled nearly $3bn from emerging market funds around the world so far this year, up from $31bn a year ago, according to JPMorgan data.

Long periods of high US interest rates and a strong dollar often entice US investors to stay home rather than risk investing abroad.

Investors are already betting the countries will try to weaken their currencies and make their exports more competitive with US tariffs, a move that could depress dollar earnings in emerging markets. emerging.

“There’s a case to be made that protectionism is getting worse and that America is the only way to go,” said Archie Hart, emerging markets portfolio manager at Ninety One. However, he added that the markets have been bought with strong business relationships for years.

Some investors are willing to sell off the stock market in the first half of the year, followed by a pullback, betting that rates will be set higher than Wall Street’s consensus, but will only be cut when Trump continues. and individual countries.

“Right now, what we’re seeing is sentiment, which is irrational, and has long created buying opportunities,” said Kristina Hooper, chief global market strategist at Invesco.

However, some investors are still reluctant to return to emerging markets because this means greater exposure to Chinese stocks, unless they can evaluate them within the -indices, which can cover the movements of other countries.

Those concerns were highlighted last week when shares of social media and games company Tencent fell sharply after it was identified by the Pentagon as having links to the Chinese military. The company makes up 4 percent of the MSCI index, or roughly the total weight of Brazilian stocks.

“China has just changed, for many people, it is almost like people; it’s been impossible,” said Mark McCormick, head of foreign exchange and emerging markets strategy at TD Securities.