The View | Enjoy the rally in emerging markets while it lasts
Sentiment depends on oil prices not collapsing, growth in China holding up and the Fed maintaining a measured pace of rate increases
For an indication of how investor sentiment towards emerging markets (EMs) has fared since the victory of Donald Trump in the US presidential election on November 8, look no further than the Mexican peso.
In the eight weeks following Trump’s triumph, the peso – dubbed the “Trumpometer” during the election campaign because of Mexico’s acute vulnerability to the protectionist measures pledged by Trump, which included withdrawing the US from the North American Free Trade Agreement (NAFTA) and building a wall along the US-Mexico border to keep immigrants out – plunged nearly 20 per cent against the dollar.
The entire EM asset class has performed strongly since the start of 2017 in one of the most unexpected developments in financial markets
Yet since mid-January, it has been a different picture altogether.
A flurry of conciliatory comments from members of the Trump administration, coupled with a successful currency hedging programme by Mexico’s central bank, have contributed to a dramatic 15 per cent rise in the peso versus the greenback since January 19.
Indeed, since the beginning of this year, the peso, which lost more than 20 per cent against the dollar in 2016, has been the world’s second-best performing currency.
The best-performing one has been the South African rand - another vulnerable EM currency because of a toxic combination of domestic political risk and the South African economy’s heightened sensitivity to downward pressure on commodity prices – which has shot up more than 10 per cent against the dollar.