Why Emerging Markets Are Suffering in Current Environment

Since the US presidential election, emerging markets (EEM) have seen huge fluctuations. President-elect Donald Trump’s proposed protectionism approach, the stronger US dollar (UUP), and the steeper yield curve are mainly responsible for the fall in performance.

The iShares MSCI Emerging Markets ETF (EEM), which tracks the performance of emerging markets (VWO) (EDC), fell nearly 6.5% between November 8, 2016, and December 30, 2016. The US dollar index rose nearly 4.4% during the same time period. The dollar index and the emerging markets have a negative correlation.

Trump’s protectionist approach could restrict the financial and trade flows between the United States and China. His proposed economic policies mainly aim to create jobs in the United States (QQQ) (SPY). He said during his campaign that he will put higher import duties on various Chinese products, which will help the domestic market in the United States (IWM). This protectionist approach is creating nervousness in the emerging economies.

Now various yield curves around the world are steepening. The US (SPY) (IVV), the UK (EWG), Germany (EWG), and Japan (EWJ) are all seeing steepening yield curves due in part to the Fed’s hawkish tone for 2017. The Fed anticipates three rate hikes during the year.

The yield curve has a significant correlation with economic growth. A steeper yield curve indicates rapid economic growth in the future. As bond prices fall, markets anticipate that future interest rates will be higher. A higher interest rate is appropriate when the economy is stronger. Likewise, an inverted yield curve indicates a recessionary situation in the economy (IWM) (VOO). As more growth is expected in the US economy, money may remain in US markets.

In the next part of this series, we’ll analyze the advice Goldman Sachs has given regarding investment in the equity market.