Investors are fleeing emerging-market stocks and currencies, fearful that an escalating trade war between the U.S. and China will weigh on global growth.
The MSCI Emerging Markets Index, a measure of stock performance, has fallen for 10 straight sessions through Tuesday and is down 11% from its recent highs, putting it in correction territory. Top index components like China’s
Alibaba Group Holding
and South African media company
have all slid in recent days.
Currencies have also tumbled with some, like the Colombian peso, following the Chinese yuan to record lows.
The sudden flight from the boom-and-bust asset class illustrates how drastically investor views shifted as the conflict between Washington and Beijing intensified in recent days. Many now believe the trade battle will likely weigh on global growth for the long term, undercutting the case for owning assets of emerging-market countries, particularly those with deep economic and trade links to China.
Investors pulled $6.8 billion from emerging-market stocks and bonds between last Thursday and Tuesday, according to the Institute of International Finance, a period in which the U.S. slapped more tariffs on Chinese goods and branded the country a currency manipulator for allowing the yuan to weaken. Some $2 billion of those outflows came from Chinese stocks, the IIF said.
The decline has been a rapid reversal of fortune for investors. After falling into a bear market last year, emerging-market stocks were off to a strong start in the first three months of the year, as the Federal Reserved signaled it was unlikely to raise rates after a December increase that roiled markets. Bond-market investors snapped up offerings such as the sovereign bonds of long-isolated Uzbekistan, which easily met the $1 billion target it had set for its debut sovereign-bond offering in February.
“Things have escalated beyond most people’s imaginings in recent days,” said Alejo Czerwonko executive director of emerging-markets investment strategy at UBS Wealth Management. “The fear is that things escalate into a downward spiral.”
It isn’t just emerging-markets assets that are getting hit. Growth fears shook stocks around the world and weighed on oil prices Wednesday, while boosting havens like gold, which topped $1,500 a troy ounce for the first time in more than six years.
The trade spat is only one of several factors that have rattled emerging markets in recent weeks.
Government-bond yields around the world slid further on Wednesday after interest-rate cuts by a trio of central banks—including India—exacerbated investors’ fears of slowing global growth. Central banks in Malaysia, Indonesia, South Korea and South Africa have also reduced policy rates in recent months.
Falling yields reduce the attractiveness of emerging-market assets, where investors assume more risk with the hopes of earning bigger returns those of developed markets. At the same time, the decline in yields has been accompanied by rising bond prices, helping to bolster the prices of emerging-market sovereign and corporate bonds.
A decline in commodity prices has also weighed on emerging markets. Many investors believe that slowing global growth will reduce demand for raw materials that are key components in manufacturing and construction.
Prices for oil—a key export for the economies of Colombia, Mexico and other developing countries—have fallen more than 20% from their highs of the year amid concerns of burgeoning supply and weaker demand. Prices for copper, a key export of Chile, are down nearly 14% from their recent highs.
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