Emerging markets sink after Trump victory

On a tear before the election, the average fund is down 4.4% after it because of president-elect's rhetoric about countries like Mexico and China

Nov 23, 2016 @ 12:07 pm

By John Waggoner

Emerging markets have been sinking since the election of Donald Trump, led lower by Latin America and India.

The average diversified emerging markets fund has fallen 4.4% since the Nov. 9 election, according to Morningstar, vs. a 3.5% gain for the Standard and Poor's 500 stock index.

While a 4.4% gain is relatively modest, it's noteworthy because emerging markets were on a tear before the election, soaring an average 13.6%. In contrast, developed markets were pikers. The S&P 500 had gained 6.7% before the election, including reinvested dividends, and the MSCI EAFE index, which measures developed overseas markets, had fallen 3.7%.

Trump's rhetoric against China and Mexico clearly hasn't helped emerging markets, said Todd Rosenbluth, director of ETF research for CFRA. Funds that specialize in Mexico have been hit hard since the election. iShares MSCI Mexico Capped (EWW), for example, has tumbled 15.6% since election night.

It's hard not to blame those losses on the election results. “There's a lot of speculation out there about emerging markets, but when the central theme of the winning candidate is 'F Mexico,' that part isn't that ambiguous,” said Russel Kinnel, editor of Morningstar Fund Investor.

But other factors are at work as well, said Mr. Rosenbluth. The value of the U.S. dollar hit a 13-year high, said Mr. Rosenbluth. A rising dollar tends to make investors move away from emerging markets and other risker assets, he said. In October, investors yanked an estimated $240 million from diversified emerging markets stock funds. All things being equal, rising U.S. interest rates — and the prospect of further rate hikes by the Federal Reserve — could keep the dollar strong.

The soaring greenback also hurts U.S. investors in emerging markets funds. Typically, when the dollar rises, returns from overseas investments fall, and that, in turn, tends to make U.S. investors flee. For example, Brazil's stock market has fallen 5.2% the past month in local currency, according to MSCI. In dollars, it's down 10.6%.

The emerging market troubles aren't limited to Mexico and Latin America. Van Eck Vectors Indonesia ETF (IDX) has tumbled 8.5% since the election. And Van Eck Vectors India Small-Cap ETF (SCiF) has sawed 14.75% from its returns since Nov. 8.

Best, worst diversified emerging markets funds since the election
Fund Ticker 1/1/2016 - 11/8/2016 11/8/2016 - 11/22/2016
Seafarer Overseas Value Institutional SIVLX 0.0% 0.8%
Pioneer Emerging Markets A PEMFX 10.6% 0.1%
Templeton Frontier Markets A TFMAX 3.5% -0.1%
Frontier Silk Invest New Horizons Instl FSNHX 0.0% -0.1%
Ashmore Emerging Mkts Frontier Eq Instl EFEIX 8.5% -0.3%
Wasatch Emerging Markets Select Instl WIESX 7.4% -8.7%
Wasatch Emerging Markets Small Cap Inv WAEMX 6.2% -7.8%
BMO LGM Emerging Markets Equity I MIEMX 18.5% -7.8%
Goldman Sachs N-11 Equity A GSYAX 0.5% -7.3%
Dreyfus Global Emerging Markets A DGEAX 10.5% -7.2%
S&P 500 6.6% 3.5%
MSCI EAFE -3.7% -1.3%
Average diversified emerging markets fund 13.6% -4.4%
Source: Morningstar. Dividends, gains reinvested

Broadly speaking, the anti-free trade rhetoric isn't good for most emerging markets, Mr. Kinnel said. “All the world's economies are connected, and generally what's bad news for one is bad news for another.”

Investors in emerging markets should expect volatility, and that's particularly true until the new administration presents a fully articulated trade policy. “Investors are making a guess about what Trump will do because he's always contradicted himself,” Mr. Kinnel said. “Obama, Bush and Clinton said pretty clearly what they would do. To me we're in a much more unpredictable area. And if we really want a trade war, China has more ammo than anyone else.”


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