Following Donald Trump’s presidential election win, exchange traded fund investors have been selling off their emerging market exposure as the U.S. dollar strengthened and protectionist rhetoric scared off traders.
Net redemptions from emerging market equity funds hit a five-week high in the latest week, with investors yanking $3.7 billion from emerging stock funds in the week to Wednesday, reports Nicole Bullock for the Financial Times.
Accoding to EPFR Global data, Asia ex-Japan equity funds saw net redemptions of $2.36 billion in the week ended Wednesday, the largest weekly outflow since September of 2015. China equity funds also experienced their largest outflows since May at $667 million.
Among the largest emerging market ETF options, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) saw $3.6 billion in net outflows and the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) lost $914.5 million in assets since the start of the fourth quarter, according to XTF data.
“That seems consistent with investor uncertainty about emerging markets, especially Asia, when it comes to some of the rhetoric with regard to potential changes in trade policy let alone where we may see the dollar continue to move,” David Mazza, head of ETF and mutual fund research at State Street Global Advisors, told the Financial Times. “It has an impact at the country and the company level for many of these emerging markets.”
Trump has been espousing protectionist trade policies that could curb imports. The President-elect’s transition team also recently announced plans to create a National Trade Council inside the White House to oversee industrial policy and appointed Peter Navaroo, the author of Death by China and an architect of the populist economic message, to head it.
Meanwhile, the tightening Federal Reserve monetary policy and improving U.S. economic outlook have strengthened the U.S. dollar, which has in turn weighed on emerging market assets.
“There is a lot of EM debt denominated in dollars,” Nicholas Colas, chief market strategist at Convergex, told the Financial Times. “That works fine as long as currency markets are stable and not well at all when the dollar is strengthening. Because they have dollar-based debt, it puts a real crimp on balance sheets as the value of the debt basically explodes without any commensurate improvement in corporate fundamentals.”
In contrast, almost $65 billion have flowed into U.S. equity funds since the election on hopes that the Trump administration would fuel economic growth.
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