If investors had been surveying their portfolios in the lead-up to Trump’s “liberation day” on April 2 (when the president announced trade tariffs), they would have been justified in being a little concerned about any emerging market stocks that they held.
Countries seen as emerging, because the economy is growing and becoming more global — such as China and India but also Malaysia and Indonesia — could have been in for a kicking: tariffs might have strengthened the dollar (as they did in Trump’s first term), and smaller economies are typically hurt more by any big changes or tariffs.
The reality, however, has been very different. Since the start of the year, the MSCI Emerging Markets index, which tracks companies from 26 countries, is about level. China stocks are up 6.5 per cent, India up 0.5 per cent and Brazil 11 per cent.
The MSCI USA index, on the other hand, is down more than 10 per cent.
There are a few possible reasons for emerging markets’ better-than-expected performance. First, Trump’s tariffs have resulted in a weaker dollar — in fact, the dollar index is languishing near a three-year low — and a weaker dollar is good for emerging markets.
Many emerging economies are reliant on debt linked to the dollar, so a weaker dollar means that their borrowing is cheaper. Any money made in their own currency is worth more, because they can buy more dollars, and a weaker US dollar is generally positive for overall economic growth, which benefits developing economies.
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Looking positive
The case for investing in emerging markets is also getting stronger. Typically, investors have looked at these developing economies as classic high-risk, high-reward options: there is potential for very, very good years and strong growth, but there may be some very bad years in there too.
Over the past decade or so, investors haven’t had to be inventive (or take on too much risk) in their hunt for growth. The S&P 500, the main stock market in the US, has been the best performing major market in ten of the past 14 years and — even with the latest wobble — is up 147 per cent over a decade.
Most of the recent big winners, such as Amazon, Nvidia and Apple, are listed across the Pond, and the majority of investors have become increasingly exposed to the US.
Since Trump’s tariffs, however, questions have been raised over whether, or for how long, this might continue.
There are fears of a possible recession Stateside, and US stocks, bonds and the dollar have all fallen in tandem.
As investors consider the future of the US as a place for growth, they are turning elsewhere.
“It’s almost like investors had forgotten about emerging markets for a decade or more because the US economy and stock market has provided so much of the growth,” said Ed Monk from the fund house Fidelity.
“But if we are at the end of that growth, and it’s not for certain that we are but we could be, suddenly investors are looking and asking, where is that growth going to come from? And that reinstates the case for emerging markets, which naturally give more growth.”
Monk said that investors had typically considered emerging markets to have a higher level of governance risk, currency risk and more volatility. Now, however, you could say that the US is displaying a lot of that risk. He pointed out that Trump had tried to get the Federal Reserve to alter its monetary policy, something you would typically associate more with an emerging market.
Lena Tsymbaluk from the investment research firm Morningstar agreed. She said: “Trump’s tariffs have reignited talks about global supply chains and the vulnerabilities of over-reliance on one economy.
“It doesn’t mean that investors should go all-in on emerging markets, but it does support having at least a modest allocation — not just for growth, but as a hedge against concentrated geopolitical risks.”
Some emerging market countries might even be able to benefit from the global shifting trade relationships. This week, the US vice-president, JD Vance, met India’s prime minister and trade negotiations were high on the agenda.
And going forwards, there is more room for more returns. Tsymbaluk says that India’s economy is expected to maintain a growth rate of 6 to 7 per cent, while Latin America has generally responded positively to the tariffs because most regions face Trump’s lowest rate of 10 per cent.
When it comes to valuations, the discount on emerging markets versus developed markets is at 34 per cent, close to the highest it has been in 20 years — it won’t catch up completely, but there is plenty of room for that gap to close.
