The startling win of the Republican nominee Donald Trump as the next U.S. president has rattled the emerging market economies. Trump's win has sent shockwaves across the emerging markets owing to his unpredictable nature, coupled with his anti-trade policies, and triggered a broad sell-off. The emerging market ETFs have had a dream run in the February-October 2016 period. However, the situation has seen a complete downturn once the U.S. presidential election result became clear.
According to JPMorgan (JPM), investors pulled a record $6.4 billion from emerging bond funds - 10% of what had been received year-to-date. Equity funds shed a third of year-to-date inflows. A Bank of America Merrill Lynch investor survey just after the U.S. presidential election revealed that emerging equity allocations suffered the steepest month-on-month drop in the last five and half years.
Trump's win might deal a major blow to Mexico as he believes that the nation has taken away jobs from Americans. He also plans renegotiations with the NAFTA and build a wall along the U.S.-Mexico border to curb illegal immigration. During Trump's presidency, trade barriers with China could also be raised. Trump's campaigns also indicated a more restrictive trade stance with China. Severed trade ties will also be a blow to countries like South Korea, Indonesia and Philippines. South Korea relies heavily on exports and will be hit if its products become more expensive for U.S. consumers.
Emerging Market Currencies Plunge
The prospects of a major tax cut, huge government spending and fiscal stimulus have triggered higher U.S. bond yields and strengthened the U.S. dollar. This scenario has been impacting emerging-market currencies. The U.S. dollar strength has been driven largely by expectations of an interest rate hike in December. This will affect emerging market currencies further. It will push global investors to pour money in the U.S. dollar for higher yield. As per Tim Hayes, a chief global investment strategist at Ned Davis Research, the emerging markets, at present, can expect to resume their advance only on expectations of broadening economic growth.
Is a Turnaround in Sight?
According to a recent report by OECD, the world economy is likely to grow 3.3% in 2017 and 3.6% in 2018. The US fiscal stimulus is expected to boost global GDP growth by around 0.1% in 2017 and 0.3% in 2018. Emerging market economies that typically produce and export commodities and basic goods would be less directly affected by expected higher trade barriers.
Moreover, global commodity prices are important for healthy public finances in many emerging economies as well as to their sovereign credit ratings.
Further, to boost growth, several emerging economies have been resorting to policy easing via interest rate cuts or offering some accommodative measures. Among the set, China, India, Turkey, Russia and Indonesia deserve a mention.
Many of the emerging economies are implementing pro-growth reforms as well. Thus, higher growth rates should offer investors both capital gains and solid yields. Importantly, emerging market bond ETFs provide portfolio diversification, because their returns are not closely correlated to traditional asset classes. Investors who are looking to offset the currency risk are likely to consider emerging market bonds issued in local currencies as a valuable hedging tool.
Two Emerging Market Economies to Watch
After Trump's surprising victory, some asset classes and world markets emerged winners while others took the hit. Among the winners, Russia seems to be benefiting the most under Trump presidency. This is because Russia is likely to gain from Trump's victory as the U.S. president has indicated his affinity toward Vladimir Putin. Notably, the relationship between the U.S. and Russia has been strained since the latter annexed Crimea from Ukraine in early 2014. But now the ice may start melting.
Another country which is likely to be on the winning side under Trump's regime is India. One country which was able to draw Trump's respect during the election campaign was India. If we are to keep faith in his election speeches, then certainly something good is waiting for the Indo-US relationship. Trump's victory may bring the US and India closer to complement each other's growth prospects.
ETFs in Focus
Below we highlight a few Russia and India ETFs which we believe will perform reasonably well in the days ahead:
VanEck Vectors Russia ETF (NYSEARCA:RSX): This fund replicates as closely as possible, before fees and expenses, the price and yield performance of MVIS Russia Index. The ETF manages assets worth $1,894.10 million and an average daily trading volume of 8,923,362 shares. The fund charges an expense ratio of 62 basis points a year. RSX gained 14.68% in the last one year.
VanEck Vectors Russia Small-Cap ETF (NYSEARCA:RSXJ): This ETF replicates as closely as possible, before fees and expenses, the price and yield performance of MVIS Russia Small-Cap Index. The fund manages an asset size of over $76.70 million and an average daily trading volume of 35,225 shares. The fund charges an expense ratio of 67 basis points a year. RSXJ gained a whopping 68.00% in the last one year.
iShares MSCI India Index ETF (BATS:INDA): This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI India Index. The fund manages an asset size of over $3,681.83 million and an average daily trading volume of 2,304,457 shares. The fund charges an expense ratio of 68 basis points a year. INDA lost 3.20% in the last one year.
iShares S&P India Nifty Fifty Index ETF (NASDAQ:INDY): This fund seeks to track the investment results of CNX Nifty Index composed of 50 of the largest Indian equities. The ETF manages assets worth $703.45 million and an average daily trading volume of 144,999 shares. The fund charges an expense ratio of 94 basis points a year. INDY dropped 3.20% in the last one year.