We believe Donald J. Trump’s victory in the US election has fueled three main concerns for Emerging Markets (EM): potential protectionist trade policies, rising rates and a strengthening US dollar. The surprising result created uncertainty for EM, which is reflected in equity market performance and flows since the election: the MSCI EM Index is down 5%, underperforming developed market (DM) equities by almost 7% and suffering the worst week of underperformance since the financial crisis1. EM equity flows have also sharply reversed; outflows hit $7bn in the week following the election – equating to one third of year-to-date (YTD) inflows2.
We believe the initial market reaction is underappreciating the diversity of the EM opportunity set and the wide-ranging impacts of trade policy, rising US interest rates and a strengthening dollar on each of the 23 economies in EM. We also think investors may be overestimating the potential for campaign promises to become
In our view, the long-term case for owning EM equities – portfolio diversification and alpha potential – remains intact. In this piece, we discuss some of the key reasons we believe long-term investors, especially those trying to build up to a strategic weight in EM, should stay the course.