Emerging Markets: Trading Tantrums

Emerging Markets, most notably China, felt the brunt of the talks about tariffs in Q2, as well as our increasing interest rates.

China’s stock market was down 3.25% and her currency (the yuan) dropped 5.04% against the dollar, for a combined loss of over 8% for U.S. investors. While other emerging markets were also down, the relative size of China’s market tended to drive returns for the quarter. An important aspect is the fact that the U.S. dollar had one of its strongest quarters, appreciating against nearly all major foreign currencies, both developed and emerging. There are many reasons for currency fluctuations, but in the short-term they are often driven by interest rate differentials and the increases in U.S. interest rates also took their toll on emerging market currencies.

The performance of China’s stock market did not reflect the country’s mostly positive news, including continued strong productivity and expected economic growth. Other news items from emerging markets included:

  • India’s raising key interest rates for the first time in four years to help control growth,
  • Saudi Arabia and Argentina being reclassified from frontier markets to Emerging Markets due to their improving growth and stability, and
  • Mexico electing a populist President, Andres Manuel Lopez Obrador (referred to as AMLO), who promised to control corruption and to re-write the North American Free Trade Agreement (NAFTA).

You may recall that Emerging Markets had also been performing well prior to this quarter, with returns much better than in other markets. Thinking long-term, the growth story here is still very compelling, whether it be from more efficient manufacturing, higher global demand for commodities, or the growth of each of these countries’ middle class and the rewards that growth brings.

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