Tuesday, February 07, 2017 05.15PM / By Georgi Kantchev and Gregor Stuart Hunter / WSJ
Emerging Markets Shake Off Trump Slump to Be Year’s Big Winners, So Far. Investors focus on benefits for developing economies of strong global growth, low valuations and rising commodity prices.
Emerging markets were expected to suffer the most from Donald Trump’s election victory, but developing world assets have been among the biggest winners so far this year.
Emerging market currencies, bonds and shares fell sharply on Mr. Trump’s November election victory, as investors anticipated rising U.S. interest rates, a stronger dollar and more barriers to trade.
Many investors now believe that the worst is priced in. They are, instead, focusing on the benefits for developing countries of strong global growth, near-record low valuations and rising commodity prices.
The MSCI Emerging Markets Index of stocks has gained by around 7% so far this year, more than double the gains of the S&P 500. The MSCI China stock index is up around 4% since the election. In currencies, Brazil’s real is now stronger than it was before the vote and even the Mexican peso, which has been particularly sensitive to Mr. Trump’s rhetoric, has rallied in recent weeks.
“Much of what Trump is promising to do has already been priced in and chances are that he under delivers” on promises like a border tax, said Jan Dehn, head of research at emerging markets asset manager Ashmore Group. “This in turn means…a less hostile environment for emerging markets.”
Still, big risks remain, not least if commodity prices fall again and Mr. Trump follows through on policies such as increased tariffs.
For now, though, investors like Tim Love are seeing good returns.
The emerging markets investment director at GAM Holding says his best trades this year include buying the shares of Russian aluminum giant United Co. Rusal PLC and Brazil’s Banco do Brasil SA.
“Emerging market assets were already too low…then Trump came in and they were pummeled further. [so] emerging markets are now the ugly duckling on the market,” said Mr. Love, whose firm manages $120 billion. “It’s worth taking a few more bets.”
Money managers poured $1.4 billion into emerging market equities in the week to last Wednesday, the most in 16 weeks, according to data provider EPFR Global. Investors have also warmed up to emerging markets bonds, with inflows to debt funds rising for four of the last five weeks, according to EPFR data.
In the weeks after the U.S. election, investors yanked more than $5 billion from emerging market equity funds.
Much of that money returned to the U.S. as Mr. Trump’s talk of fiscal spending and tax cuts sparked a rally in stocks and sent yields on Treasurys sharply higher.
Expectations for higher interest rates rose, which then pushed up the dollar. Higher U.S. interest rates and a stronger dollar are typically bad news for emerging markets, whose debt and commodity exports are often dollar denominated.
The Trump trade has shown signs of waning. The dollar, for instance, is now down more than 1% since the beginning of the year.
As that trade turns, investors are have another look at emerging markets.
They have other reasons too. The prices of commodities like metals and sugar have risen and oil has stabilized above $50 a barrel.
Big commodity producers like Russia are benefiting. The International Monetary Fund expects that country’s economy to expand by 1.1% this year after two years of recession.
The IMF expects emerging economies as a whole to grow by 4.5% this year, up from 4.1% last year and more than double the rate in advanced economies.
In Asia, companies are signaling that earnings have stabilized, said Rahul Chadha, co-chief investment officer at South Korea’s Mirae Asset Global Investments, which manages $90 billion. Corporate earnings in Asia had fallen for several years.
“As people see earnings upgraded and all this rhetoric on protectionism [by Mr. Trump] gives way to more practical solutions, I think the flows are going to come here,”” said Mr. Chadha. For the first time in five years, Mr. Chadha recently went overweight Korean equities, meaning he aims to hold a larger share of them than a benchmark portfolio would suggest.
Emerging-market stocks are also coming off a low base. They have underperformed against their developed world peers for more than two years, dragged lower by weak commodity prices, the higher dollar and worries about the consequences of Mr. Trump’s “America First” platform.
Share-market valuations, measured by the price-to-earnings ratio, in developing countries are close to their lowest levels on record, according data going back to 2005 by the Institute of International Finance. Valuations on mature markets are near their highest since 2008, according to the IIF.
“Combine [rising commodity prices] with much cheaper valuations plus the lack of upside in developed markets and…well, that all adds up to a compelling investment proposition,” said Ashmore’s Mr. Dehn.
Some investors, however, are still cautious given what they see as the difficulties in predicting Mr. Trump.
““I wouldn’t want to give the all clear,” said Richard Segal, emerging-market analyst at Manulife Asset Management, which manages $343 billion.
“Protectionism could be around the corner and we are always one social media message away from problems with Mexico or China,” Mr. Segal said.
Write to Georgi Kantchev at email@example.com and Gregor Stuart Hunter at firstname.lastname@example.org
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