The JPM GBI-EM index, which tracks local currency emerging market government bonds, has fallen by more than 8% since the US presidential election, its steepest fall since the 2013 taper tantrum. Emerging market equities have only tumbled by slightly less.
Foreign investors have also started to pull out the money they had been committing to emerging market assets earlier this year. Since the US election, they have withdrawn some $6bn (€5.6bn) from emerging market equities and bonds, according to the International Institute of Finance (IIF).
Is this just a blip triggered by initial panic about the possible damage a protectionist president Trump could inflict on export-dependent emerging markets, which could subside if Trump doesn’t turn out all that bad for EM? Or has there now come an end to the positive dynamics that have benefited EM assets for much of 2016?
Maarten-Jan Bakkum, emerging markets strategist at the multi-asset team of NN Investment Partners, believes the underpinnings of the EM recovery that unfolded this year have disappeared just as quickly as they emerged at the start of the year.
Goodbye carry trade
“Emerging markets had been benefitting from the search for yield as developed market interest rates were so much lower, but the carry trade is now off the table. We were overweight in EM local currency but went underweight right after the election. In hindsight, I’m very glad we did that,” he told Expert Investor at a press meeting in London on Tuesday.
The fact that the popularity of emerging markets this year was based on low interest rates in the West and easy monetary conditions rather than on accelerating growth has left emerging markets exposed to a setback once these external drivers disappear. While the reflationary environment that a Trump election has heralded is the initial trigger, the worsening outlook for global trade doesn’t help emerging markets either.