Trump's Tariff Plans Spook Emerging-Market Investors

03/04/18 08:14 AM EST
By Ira Iosebashvili 

The re-emergence of global trade fears is confronting investors in once-buoyant emerging markets with a sharp increase in uncertainty over the outlook for growth and investment around the world.

President Donald Trump's pledge to impose tariffs on foreign aluminum and steel hit the currencies of export-dependent countries such as Mexico and Russia and contributed to a 2.8% decline in the MSCI Emerging Markets Index, which measures stock performance, for the week ended Friday.

Many emerging markets rely on raw materials and other exports to sustain their economies, making them particularly vulnerable to changes in commodity markets, especially if the U.S. adopts protectionist measures. Asset values across emerging markets have stalled this year after a long rally was interrupted by a rise in U.S. interest rates, which reduced demand for risky securities and made safer U.S.-issued securities relatively more appealing.

Many are concerned that an extended period of uncertainty could hamper further gains in emerging markets, where returns in recent years have dwarfed those found in developed markets.

Emerging markets' "time in the sun is coming to an end," said Alan Robinson, global portfolio adviser at RBC Wealth Management. "Clearly, the uncertainty on trade doesn't help matters."

Investors pulled a net $4.5 billion out of emerging-market funds in February, ending a 14-month streak of net inflows, data from the Institute of International Finance showed. Emerging-market stocks are down 7.1% from multiyear highs hit in January. The MSCI Emerging Markets Currencies Index has lost 1% from the start of the year through Thursday, after hitting an all-time high earlier this year.

The losses stand in contrast to a rally that has rewarded investors in recent years. Emerging-market stocks have risen nearly 49% since the beginning of 2016, beating out gains in U.S. and European averages. The MSCI Emerging Market Currencies Index is up 17% in the same period, fueled by investors seeking to buy the bonds of developing countries, some of which are denominated in the local currency and offer comparatively high yields.

Part of the week's selling came after Federal Reserve Chairman Jerome Powell told Congress on Tuesday that the U.S. economic outlook remained bright amid stronger growth and inflation. Some investors believe the comments suggested the central bank may begin raising rates at a faster pace this year, a move that could drive up U.S. yields, making emerging markets seem less attractive by comparison.

Currencies that have notched big gains this year may be most vulnerable if markets stay rocky, said Kit Juckes, a strategist at Société Générale. Many of those also belong to countries that have benefited most from trade and a reinvigorated global economy and are heavily dependent on exports.

"If Donald Trump does bad things for global growth, I don't want to be anywhere near currencies like the Mexican peso and South African rand," Mr. Juckes said.

The peso is down 1.4% against the dollar last week, after climbing 6.1% from the beginning of the year until Feb. 23. The rand has lost 3.1%, after a nearly 7% gain in that period. The Russian ruble is off 1.1%, after a 2.7% gain.

A further rise in U.S. bond yields, meanwhile, could hurt countries like South Korea, where rates are low compared with other emerging markets. The Korean won is down 1.2% this year, after rising more than 13% in 2017.

Another worry is China, the world's second-largest economy and the top consumer of many raw materials. Officials there face the task of deflating potentially dangerous bubbles in economic sectors such as real estate, a move that could hurt growth. China's official manufacturing purchasing managers index, a gauge of factory activity, dropped to its lowest level in 19 months in February.

Many investors remain optimistic for the long term, noting that equity valuations in the sector are still more attractive than those in developed markets. Many developing countries have also built up reserves, tamed inflation and scrapped currency pegs, making them more able to withstand periods of global volatility.

Markets have also become deeper and more liquid. Emerging markets accounted for nearly 25% of global fixed income in 2017, compared with 2% in 2000, data from Insight Investment showed.

"The macroeconomic picture is totally different," said Gaurav Mallik a portfolio strategist with State Street Global Advisors.

Key countries are doing much better today than they did earlier in the decade, or during the Asian Crisis of the late 1990s, Mr. Malik said.

Still, many are preparing for a bumpier ride.

"The trade where you buy everything and don't worry about anything is over," said Federico Kaune, head of emerging markets fixed income at UBS Asset Management.

Write to Ira Iosebashvili at


(END) Dow Jones Newswires

March 04, 2018 08:14 ET (13:14 GMT)

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