The recent strength in the U.S. dollar and sudden pullback in developing country currencies have pressured emerging market ETFs in recent weeks.
Over the past three months, the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG), the two most popular and largest EM-related ETFs on the market, dipped 1.1% and 1.3% year-to-date, compared to the S&P 500’s 0.6% gain.
More recently, President Donald Trump’s decision to exit the Iran nuclear deal added another round of risk-off buying, which further helped support the greenback. In contrast, the Russian ruble, Indonesian rupiah and South African rand, among others, were among the worst off in the latest swing.
The recent rise in the USD and Treasury yields have dragged on emerging market asset performance, increasing debt costs and inflation for some developing countries while pulling back into the U.S., the Wall Street Journal reports.
“President Trump’s decision…means geopolitical risks remain high and this added uncertainty leaves emerging market sentiment fragile for now,” analysts at MUFG said in a research note.
New Deal Between Iran and U.S.?
Nevertheless, some market watchers are hopeful that a new deal between Iran and the U.S. is in the works, with some traders easing the losses in emerging market currencies, Piotr Matys, emerging market foreign exchange strategist at Rabobank, told the WSJ.
Trump’s move has also sent crude oil to a fresh three-and-a-half year high of $77 per barrel Wednesday. The rising costs for raw materials, like crude oil, are particularly troublesome for some emerging economies that rely on imports, such as Turkey.
The ongoing trend this year be a wake up call for emerging market traders whom enjoyed a relatively optimal year in 2017. Money poured into the emerging markets last year and earlier this year on a soft U.S. dollar, low volatility and broad global growth. However, the recent volatility has many questioning the easy play.
For more information on the developing economies, visit our emerging markets category.