Emerging markets roar despite Trump’s Twitter rants

PUBLISHED : Wednesday, 22 February, 2017, 12:37am
UPDATED : Wednesday, 22 February, 2017, 3:22pm

US President Donald Trump has supported many policies that could harm emerging market economies. But investors are betting that his bark will turn out to be worse than his bite.

More than US$7 billion has poured into exchange-traded funds tracking emerging market stocks and bonds this year through February 19. That runs counter to the six weeks after Trump’s election victory, when investors yanked US$2 billion from the funds on concerns about his promises to reshape America’s trade agreements. Clearly those fears have receded.

Trump’s rhetoric had a “temporary impact” on emerging markets, according to Edward Kerschner, chief portfolio strategist at Columbia Threadneedle Investments. Developing markets are “growing at double or triple the rate of Europe or Japan” and the expansion will accelerate through 2020, he said.

Emerging market bulls point to the strong fundamentals in the sector, improving local regulation and the opportunity to pick up assets on the cheap. After falling to a four-month low one week after the US election, the MSCI Emerging Markets Index, which is heavily weighted in China and South Korea, had climbed by 12 per cent to 944 on Monday, data showed.

“This is how people are going to be positioning portfolios moving forward as the next big thing,” said Heidi Richardson, head of US investment strategy at BlackRock’s iShares.

The iShares’s Core MSCI Emerging Markets fund has grown by nearly US$4 billion, or around 20 per cent, this year, the most of any US-listed ETF. The biggest emerging-market ETF, Vanguard’s FTSE Emerging Markets ETF, has seen roughly half the inflows, though its expense ratio is slightly higher.

Countries that are attracting bargain-hunters this year include Mexico and Turkey, according to Fran Rodilosso, head of fixed income ETF portfolio management at Van Eck Associates Corp.

“For value seekers, Mexico is like the eye of the Trump storm,” he said.The Mexican peso was battered after the election as Trump pledged to build a wall to stem immigration and implement a border tax.

But the biggest Mexico fund, the iShares MSCI Mexico Capped ETF, is up 4 per cent this year. It’s not just equities, either. The iShares J.P. Morgan USD Emerging Markets Bond ETF has swelled by US$750 million in 2017.

“You’d think that a reflationary trade is bad for debt, but people are still looking for yield and cushion,” Rodilosso said. With local emerging market bonds, “you have 6.5 per cent yield and different dynamics for all of the countries.”

Of course, there’s no telling if investors will abruptly change course and start unloading emerging market assets again. But if they do, it’s unlikely to be because of Trump administration policies, according to Columbia Threadneedle’s Kerschner.

“I think you’ll see tweets,” he said. “I don’t think you’ll see legislation.”