Immediately after Donald Trump clutched the presidential election, emerging market stocks and exchange traded funds were pummeled, with billions of dollars taken out of the area.
For instance, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) declined 6.6% over the past week. EEM was also the most unpopular ETF trade of the past week, with investors yanking $2.7 billion from the fund, according to XTF data.
Citigroup Inc. strategists led by Dirk Willer and Luis Costa argued that the emerging markets are experiencing a so-called Trump Tantrum, similar to the what developing market assets saw during the “taper tantrum” in 2013, Bloomberg reports.
Both the 2013 taper tantrum and the current Trump tantrum were driven by spikes in U.S. interest rates. Analysts anticipate demand for emerging market assets will again be unable to disassociate with the sudden change in rates.
“In rates, around half is done for U.S., and a bit less for EM,” the Citigroup analysts said. Meanwhile, emerging-market currencies are “more than half done” when compared to the taper tantrum-like decline, and in emerging-market corporate bonds, “almost 1/2 of the taper tantrum sell-off is done.”
[related_stories]Mexico and Asian markets have been the hardest hit in the latest turn as traders priced in president-elect Donald Trump’s “America first” motto, which could result in greater protectionist policies or higher tariffs on import goods from these regions.
“The underperformance of MXN and EM Asia is of course easily explained by the focus of President-elect Trump,” Citi said. “We don’t think Mexican rates can decouple, at least before an extraordinarily large rate hike out of Banxico.”
If Citigroup is right, the short-term selling may still have legs. Moreover, Citi anticipates the fallout may be even worse than the 2013 selloff, despite generally stronger fiscal positions in emerging economies.
“While it is not clear how much of this protectionist part of President-elect Trump’s platform can be implemented, it is clear that any move in this direction would add further impetus to inflation in the U.S., and would also redistribute growth from emerging markets to the U.S.,” Citi added. “This would suggest that EMFX can actually perform worse than in 2013, relative to U.S. assets. Furthermore, a potential trade war with China would undermine the commodity consumption by China and offset the positive impact from the U.S infrastructure spend.”
Investors can also hedge against a further pullback in the emerging markets through inverse ETF options. For instance, the ProShares Short MSCI Emerging Markets (NYSEArca: EUM) takes the inverse or -100% daily performance of the MSCI Emerging Markets Index, the benchmark to EEM. The ProShares UltraShort MSCI Emerging Markets (NYSEArca: EEV) follows the -2x or -200% daily performance of the Emerging Market Index. Additionally, the Direxion Daily Emerging Markets Bear 3x Shares (NYSEArca: EDZ) tracks the -3x or -300% performance of the benchmark.
For more information on the developing economies, visit our emerging markets category.
iShares MSCI Emerging Markets ETF
Chart courtesy xtf.com