Market Memo: How is the EM doing post-Trump?

04-11-2017

A little more than three months ago, when we outlined our thoughts on the emerging markets (EM) in the wake of President Trump’s surprise victory and the likelihood the Federal Reserve was initiating a tightening cycle, we posed this question: should or should we not avoid the EM? Contrary to many in the investment community at the time, we made the case that there were numerous opportunities in the EM if an investor knew where to look. So what’s the verdict? The Fed did raise interest rates by 25 basis points in March, its second such increase in three months, and signaled at least two more moves are likely this year. But far from depreciating as historically has been the case when the Fed begins to raise rates, EM currencies have rallied against the dollar, with the Mexican peso up 11% in the first quarter and the Russian ruble up 9%.

While international investors may have experienced higher blood pressure with each presidential tweet on trade tariffs, the border wall, anti-immigration policies, etc., it’s worth noting that Trump to date has not enacted any policy in accordance with his tweets or campaign promises. In fact, Trump seems to have run into his own wall in trying to push his agenda through. As for the Mexican investment opportunities we highlighted in late December, the tortilla producer with 20 tortilla plants and six corn flour mills in the U.S. returned more than 10% in Q1. Another Mexican bakery company returned 9%. In fact, the MSCI Mexico Index as a whole returned 15.9% for the quarter, vs. 6.2% for the MSCI US index. What side of the wall would you rather have been on?

Brazil and Russia improving
Two other EM markets we highlighted were Brazil and Russia, whose economies are expected to emerge out of recessions by the end of this year. While both face a steep road ahead, optimism continues to prevail. The MSCI Brazil index returned 10.4% in Q1, on top of last year’s remarkable 65% return as positive news flow, sentiment and higher commodity prices helped carry the market higher. As for Russia, Standard & Poor’s last month upgraded its economic growth outlook from stable to positive, abetted by oil’s near doubling in price last year off its 2015 low. The MSCI Russia index nonetheless fell 4.6% in the first quarter, in part because it tends to track oil prices, which dipped below $50 in March after holding around $54 the first two months of the quarter. 

The overall EM asset class has outperformed developed markets year-to-date, with the MSCI EM index up 11% compared to 7.3% for the MSCI EAFE index in Q1. While international investors in general are still underweight EM, there has been a significant inflow of money into the asset class so far this year, led by $6.1 billion into India (the MSCI India index rose 17% in Q1), $2.1 billion into Mexico and $1.5 billion into Russia, according to Bloomberg News. This would suggest the answer to the very last question we asked in December, can one election derail the positive fundamentals in foreign economies, is a resounding, “No!” despite protectionist rhetoric. We are maintaining our positive outlook on the asset class for 2017 as valuations remain below those of developed markets.