Trade Worries effect on Emerging Markets

Investors are beginning to run away from emerging markets due to the growing panic of the ongoing trade conflicts. Emerging markets fell more than 10% in May from its April highs (with investors pulling almost $4 billion from ETFs focusing on emerging markets), and currencies followed the decline.

Why is this occurring?

Well, investors are turning towards the conservative approach and laying off riskier stocks since President Trump’s announcement to increase tariffs on China. Additionally, Trump has imposed the possibility of escalating tariffs on Mexico as soon as June 10 for their lack of involvement in controlling the border for Central American migrants. Paresh Upadhyaya, a portfolio manager at Amundi Pioneer Asset Management, adds that these emerging countries “will not be able to grow if trade concerns weigh on the global economy.”

So why are investors fading from these emerging markets?

Money managers are beginning to fade away from this risky asset class known as emerging markets. These managers usually turn to these emerging-market assets when attempting to bolster performance, but once volatility hits, the growth begins to become into question.

Investors initially pounded this market early in Q1 2019 since the outlook for a hike in interest rates was unlikely, and the Trump administration was on-track to straighten out the trade worries. Michael Crook, head of America’s investment strategy at UBS Global Wealth Management, recently cut his portfolio’s exposure to US emerging markets, believing that these trade conflicts could be here to stay.

Recent Statistics and Observations

In April, the International Monetary Fund cut its estimates for Global Growth due to the increase in trade and tariff questions. Additionally, yields on governments bonds hit 2019 lows last week as investors turn to safer plays. Lastly, activity in Chinese factories fell in the recent month of May, as the order for goods dropped in response to the uncertainty created with the trade disputes. Given that China is a key market for goods in developing markets, it should be interesting to see the impact these ongoing trade tensions have.