As investors shied away from riskier assets in the wake of the Brexit results, emerging market exchange traded funds were pummeled, dipping below their long-term trend lines.
The iShares MSCI Emerging Markets ETF (NYSEArca: EEM) fell 1.4% Monday and was trading below its 200-day simple moving average while the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) dropped 1.1% and was testing its long-term resistance as well.
The United Kingdom’s referendum on its European Union membership is causing ripple effects across the world, lifting safe havens and depressing riskier assets like the emerging markets.
For instance, in China, the yuan currency depreciated to its weakest against the U.S. dollar since late 2010, after The People’s of Bank of China weakened the yuan by the most since August, reports Georgi Kanthcev for the Wall Street Journal.
China is the largest country-weight in the emerging market ETFs, accounting for 25.6% of EEM and 28.4% of VWO.
“Brexit has hit sentiment across the board and will have a quite strong impact on emerging markets for the next month or two, at least,” Richard Segal, emerging-market analyst at Manulife Asset Management, told the WSJ.
Analysts also warned that emerging Central and Eastern Europe are particularly vulnerable. For instance, U.K. is Poland’s third-biggest export destination and over half a million Poles live in Britain, many of whom send remittance back home. Poland makes up 1.2% of EEM’s portfolio and 1.4% of VWO.[related_stories]
Moreover, with the surge in safe-haven interest, the U.S. dollar has strengthened, which will continue to weigh on commodity prices – commodities are priced in U.S. dollar, so a stronger dollar makes them more costlier for foreign buyers. Consequently, big commodity exporting emerging markets, notably those in Africa and South America, could also come under pressure.
However, some see emerging markets as an opportunity. Geoffrey Dennis, head of global emerging-market strategy at UBS Securities, argued that the Brexit fallout will only have a modest effect on the developing economies, Bloomberg reports. For instance, Asian countries could attract more inflows as investors flee Europe’s uncertainty.
Moreover, the extended low-rate environment in the wake of the ongoing uncertainty could help maintain the emerging market play.
“Brexit is generally negative for growth but could end up helping emerging countries, especially in Asia, as it pushes back the Fed raise,” Brett Diment, head of emerging-market debt at Aberdeen Asset Management, told the WSJ.
For more information on the developing economies, visit our emerging markets category.
iShares MSCI Emerging Markets ETF