Ever since Trump started the rhetoric around tariffs, emerging markets stocks, bonds and currencies have been selling off with issues ranging from global political uncertainty to currency headwinds. Two popular emerging market ETFs – Vanguard (VWO) and iShares (EEM) are down 4.9% and 5.3% respectively this year. In comparison, the Dow Jones Industrial Average is up 2.7% in 2018 while the S&P 500 is up 5.1%. The Nasdaq Composite Index is up 10.6%.
Much of these losses have come over the past three months as tensions between the U.S. and China have escalated. Chinese equities have dropped more than 20% from a recent peak, enough to put the market in bear-market territory. Besides the trade issue, emerging markets have also come under pressure due to recent strength in the U.S. dollar. The US dollar index is up 2.8% over the past three months against a basket of emerging market currencies.
Given this backdrop, what is the outlook for emerging markets?
Future Wealth’s View
In Wall Street speak, we think it is time to “back up the truck” i.e. it is time to buy on the weakness in emerging markets. While the back and forth between Trump and China will likely continue until one backs down (we expect Trump to extend a olive branch much like he did with European Union last month), we see it as a near term series of events. While currency issues can have a positive or negative impact on profitability, it doesn’t mean much for demand or economic growth. As such, while stock prices may be volatile, we believe both trade and currency issues have little impact on the region’s fundamentals. Furthermore, the spillover effect of the trade war with China has had little impact on other emerging markets and we expect the emerging market stocks to come roaring back in the remaining months of the year. Which brings us back to the trade war.
Trump’s view on trade is baffling. Bringing jobs back to America is a noble goal but when US employees depend on customer orders and goods from China and other countries, imposing tariffs only sends them to the unemployment line. Already, we have begun to see US companies raising prices and cutting back production, and this is even before the tariffs have begun to take effect. In his book, “Turn the ship around” – L. David Marquet writes – At the top, one has all the authority and none of the information and at the bottom, one has all the information but none of the authority. Trump may do well to listen to the companies that he hopes to help before taking the next step in trade talks but then, tweeting is more fun.
An update to our article from July 15 on MoviePass- (The link to the article is here – https://futurewealthllc.com/