Investors who are on the fence about jumping into cheap developing market stocks and related exchange traded funds may like to know that in ever instance we held the mid-term elections in the U.S., it was the emerging markets that seemed to benefit.
Since 1990, investors who purchased stocks in MSCI’s emerging market equity index on October 31 in mid-term years and sold 12 months later would have generated an average return of 23%, whereas emerging market stocks only returned an average 9.3% over the same period in non-mid-term election years, Bloomberg reports.
The U.S. mid-term elections will be held mostly on Tuesday, November 6.
This may be a good seasonal play for ETFs like the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), which tries to reflect the performance of the benchmark MSCI Emerging Markets Index, especially given the current geopolitical climate and its effect on developing market stocks.
David Hauner, a cross-asset strategist at Bank of America Merrill Lynch, argued that with the threat of losing a congressional majority, President Donald Trump may be pressured to force a trade deal with North American allies and make progress with China. If a trade deal is pushed through, the uncertainty over the trade war fears that weighed on global markets may be immediately alleviated and help lift global stocks.
Safe-Haven U.S. Dollar Trade
Furthermore, a signed trade deal would also help reverse the safe-haven U.S. dollar trade, which has helped strengthen the greenback this year. With a weaker dollar, the emerging markets may enjoy more competitive exports and higher equity prices.
Related: Emerging Markets Multi-Sector Bond Outlook
Mona Mahajan, investment strategist at Allianz Global Investors, also contended that the summer volatility in developing country assets can only last so long, projecting the weaknesss to ease before the November elections and pointing to positive signs on trade with Mexico.
“President Trump and the administration want to get some wins prior to midterms,” Mahajan told Bloomberg TV.
However, there is a chance that Trump may double down on his aggressive approach and escalate his push for higher tariffs, John Normand, JPMorgan Chase & Co.’s head of cross-asset fundamental strategy, warned.
For more information on the developing economies, visit our emerging markets category.