
The emerging-market stock index tumbled into correction territory on Thursday due to a sustained sell-off fueled by uncertainties surrounding U.S. policies and growth forecasts for China.
The MSCI EM stock index dropped by 0.4%, culminating in a 10% decline since hitting its peak on October 2, officially indicating a correction. This decline was largely driven by Samsung Electronics Co Ltd and Taiwan Semiconductor Manufacturing Co, following the Biden administration’s announcement of new semiconductor trade restrictions that are set to impact almost all global markets. Learn more about these restrictions here.
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The index, heavily weighted with Chinese stocks, has suffered significant declines due to disappointing performances from shares linked to China’s economy, especially after government stimulus measures fell short of market expectations.
A related index tracking developing currencies reported a decline for the second consecutive day, coinciding with a strengthening U.S. dollar.
Emerging market assets have seen a steep drop since early October. Even with the Federal Reserve shifting towards monetary easing, inflation rates have remained high throughout October and November, leading traders to predict fewer and smaller rate cuts in upcoming meetings.
For more insights, read: Trade war fears hit rand, sparking biggest drop since June
The election of Donald Trump and the Republican Party has heightened inflation expectations, resulting in increased yields on 10-year U.S. Treasury bonds.
As Trump’s inauguration on January 20 approaches, traders are taking a more cautious approach, with his expected tariff policies contributing to significant market volatility earlier this week.
“There’s too much uncertainty surrounding Trump’s strategies to establish any firm convictions on risk assets in either direction,” remarked Henrik Gullberg, a macro strategist at Coex Partners.
“Market conditions are likely to remain volatile heading into the inauguration, influenced by Trump’s tweets and public statements.”
Investor sentiment has been further dampened by dissatisfaction with China’s stimulus measures and the weak performance of Chinese equity markets this year. Although they displayed minimal fluctuation during the day, Chinese tech stocks are on track for their most significant weekly decline in seven weeks.
Chinese markets are also under pressure from economic data indicating sluggish growth, with inflation having decreased for the fourth consecutive month.
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Greg Lesko, managing director at Deltec Asset Management LLC in New York, stated that stocks in Brazil and South Korea have contributed to the decline of the MSCI index, weighed down by concerns over fiscal policies in Brazil and the impeachment and subsequent arrest of South Korean President Yoon Suk Yeol that heavily impact those markets.
“I expect the market to remain cautious until there is greater clarity on policy, which should become evident soon… There are numerous attractive stocks available, so we anticipate promising opportunities, though some patience will be necessary,” Lesko commented.
Goldman Sachs strategists have revised their forecasts for EM equities returns for 2025, lowering their year-end target for the index from 1200 points to 1190 points.
This still suggests growth from Thursday’s close at 1066 points, as Goldman predicts moderate returns mainly driven by earnings growth.
They have indicated overweight positions in markets including China, South Africa, and Saudi Arabia, while also upgrading their outlook on Turkish equities.
Weakening Rand
The MSCI EM index faced headwinds from declining values in the Chilean peso, Mexican peso, and South African rand.
In the bond markets, high-yield dollar-denominated debt performed well, especially sovereign bonds from Bahrain, Gabon, and Lebanon. The bond market closed at 2 PM New York time for a national day of mourning for former President Jimmy Carter.
Poland has begun selling €3 billion in bonds to fulfill financing obligations, reflecting a broader trend of EM debt issuances this year as countries seek funding ahead of Trump’s inauguration.
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