Emerging markets ETFs react to Trump’s election victory

Nov 29th, 2016 | By | Category: Equities

Significant falls in the value of emerging markets exchange traded funds following the US presidential election suggest investors believe the asset class could be set for more volatility under a president Trump.

Emerging markets ETFs react to Trump’s election victory

The iShares MSCI Emerging Markets UCITS ETF tanked 8.4% in USD terms in the three days after the US election.

The iShares MSCI Emerging Markets UCITS ETF (LON: IDEM) tanked 8.4% in USD terms in the three days after he was elected.

Net flows from the iShares Emerging Markets ETF (NYSE ARCA: EEM) saw their worst day on 10 November since 2011 with more than $1.5bn of redemptions.

As the initial shock wore off, IDEM has slowly recovered by 2.9% to 25 November.

Whether the celebrity-turned-president lasts for four or eight years in the White House, he has signified his attention would be on “ripping up” existing trade deals and renegotiating better ones for America around the globe.

China, South Africa, Mexico and Turkey are reportedly the first countries on the chopping block, and they make up around 26%, 6.3%, 3.4% and 1% of the MSCI Emerging Markets Index respectively, a prominent reference for the performance of the asset class and the underlying for several ETFs.

Emerging economies may suffer under Trump’s stewardship as his “America First” policy, designed to bring back manufacturing jobs to the US, could dampen domestic demand for exports from around the globe. Trump has also been a vocal critic of NAFTA (North American Free Trade Agreement), signed under president Bill Clinton in the 1990s. President Barack Obama’s hoped-for Trans Pacific Partnership deal with 12 Pacific Rim countries is also thought to be effectively dead in the water.

Such actions may force counter measures by many emerging economies. Mexico’s central bank reacted with a monetary policy meeting on 10 November and may raise interest rates to stop the record sell-off of the peso.

Potentially adding further woes to the asset class, Trump’s pledge to spend around $1tn in fiscal stimulus was a big hit to investor sentiment in the region.

And, as 10-year US treasury yields rise – yields have already risen from 1.85% on election day to 2.3% on 25 November – this will also have a negative effect on emerging market currencies as investors shift towards relatively more attractive US assets.

HSBC analysts estimate 10-year US yields will reach a 2.5% ceiling in the first quarter of 2017.

“[Emerging Markets] ETF flows are about to look like the elevator scene from The Shining as you have the double whammy of rising rates and an oncoming ‘America first’ trade policy,” wrote Eric Balchunas, ETF analyst at Bloomberg.

A catastrophe has not come to pass yet however – and for longer-term investors, emerging market returns are still cheap compared to developed markets and returns are in the black over the last 12 months. IDEM is up 5.5% in USD terms over the past year. For sterling-based investors, the returns have been much stronger due to the currency exchange. The same fund, listed in sterling (LON: IEEM) is up 27.4% over the same period.

According to Forbes, once the initial shock of trade deal re-writes is over, economic fundamentals will reassert themselves – but whether it happens in the first 100 days of Trump’s government, or at a later stage, is still to be discerned.

While investors have been abandoning emerging markets assets they have been surprisingly bullish on US equities, indicating a continuing willingness for risk-on assets regardless of the election result. Despite market worries about a president Trump and not a single endorsement from a CEO of a Fortune 100 company, the S&P 500 has still continued its rally post-election. The SPDR S&P 500 ETF Trust (NYSE ARCA: SPY) climbed 3.4% in USD terms since 8 November.

Robert Talevski, co-founder of Activus Investment Advisors, comments in a research note that Trump’s ‘America First’ policy may have a beneficial long-term effect on emerging markets:”His protectionist approach to trade deals would be a negative – but if it was to renew US GDP growth, this would be a positive outcome for the US, having a knock-on effect on US consumer spending, jobs growth, world GDP growth and also emerging markets.”

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