Defying popular polls, Republican Donald Trump won the race to the White House defeating Democratic nominee Hillary Clinton. Trump’s win has sent shockwaves across the globe owing to his unpredictable nature coupled with his anti-trade policies and triggered a broad sell-off (read: Trump Triumphs: Stocks & ETFs to Rock or Shock).
The uncertainty currently shrouding the world’s biggest economy is expected to spell bad news for emerging markets. Higher global uncertainty coupled with risk aversion will hit several asset classes in the emerging markets including currency and equity.
The emerging markets seized a major position in the global investment arena and have had a good year so far. Low interest rates in the developed world, rising commodity prices and ongoing expectations of improving growth in developing economies made emerging market ETFs an attractive choice. However, with Trump set to enter the White House as 45th President of the United States, these securities were in for a tailspin (read: 7 Inverse/Leveraged ETFs to Buy as Markets Make Way for Trump).
The popular emerging market ETF iShares MSCI Emerging Markets ETF (EEM - Free Report) lost about 3.2% on November 9, 2016, after the election results were out. Other emerging market ETFs - iShares Core MSCI Emerging Markets ETF IEMG, iShares MSCI Emerging Markets Minimum Volatility ETF EEMV and Vanguard FTSE Emerging Markets ETF (VWO - Free Report) fell 3.1%, 2.8% and 2.6% respectively.
Several analysts are of the view that this is a negative development for the global emerging markets and will not only impact the Mexican peso, which sank 9.4% against the U.S. dollar, but also create a negative ripple effect to the other asset classes (read: Should You Play Market Zest with These Momentum ETFs?).
In the wake of Donald Trump’s win, one of the worst affected countries will be Mexico. Trump has not only accused Mexico of taking away jobs from Americans, but has also stated in his campaign that he will renegotiate the North American Free Trade Agreement and build a wall along the U.S.-Mexico border to curb illegal immigration. With more than one-third of Mexico’s GDP comprising exports to the U.S., higher barriers related to both trade and immigration could cast a long shadow over the country.
The iShares MSCI Mexico Capped ETF EWW slumped 8.5%, recording the biggest drop for the fund since the financial crisis in October 2008. Among other Mexico funds, SPDR MSCI Mexico StrategicFactors ETF QMEX dropped 7.4%, Deutsche X-trackers MSCI Mexico Hedged Equity ETF DBMX lost 2% and iShares Currency Hedged MSCI Mexico ETF HEWW fell 1.6% (read: Mexico ETFs to Hinge on U.S. Presidential Election).
If Trump goes by the policies mentioned during his campaign, several other emerging markets are also likely to suffer. Let’s take a quick look at them.
During Trump’s presidency trade barriers with China could also be raised. Trump’s campaign indicated a more restrictive trade stance between U.S. and China. China, being the world’s biggest exporter could be badly hit. Consequently, most popular large-cap focused funds – iShares FTSE China 25 Index Fund (FXI - Free Report) , iShares MSCI China Index Fund MCHI and SPDR S&P China ETF GXC – could suffer. These funds provide broad exposure to the Chinese equity market. The ETF targeting the financial sector Global X China Financials ETF CHIX will also be in the spotlight. All the above mentioned China ETFs were in red yesterday.
Apart from China, India might also be at the receiving end of Trump’s restrictive policies. Trump plans to levy higher taxes for companies for outsourcing jobs to places like India. As per India’s central bank, India exported software services constituted $50 billion worth of exports to North America. ETFs like WisdomTree India Earnings Fund EPI, PowerShares India Portfolio ETF (PIN - Free Report) , iShares MSCI India Small-Cap ETF SMIN and VanEck Vectors India Small-Cap Index ETF SCIF will be in focus (read: 5 Reasons Why Emerging Market ETFs Are Still a Buy).
Severed trade ties will also be a blow to countries like South Korea, Indonesia and Philippines. South Korea heavily relies on exports and will be hit if its products become more expensive for U.S. consumers. iShares MSCI South Korea Capped ETF (EWY - Free Report) was down 4.7% after the polls results.
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