Escalating Trade War Hits EM Currencies

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Bloomberg|

Jun 27, 2018, 10.17 AM IST

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Most major developing-nation currencies weakened against the dollar on Tuesday.

NEW YORK: Some of the world’s largest money managers soured on emerging markets as compounding trade threats deepened the worst monthly rout for developing currencies since the US election.

Goldman Sachs Group said it’s reducing an overweight position in developing-nation currencies, preferring a more “defensive” stance as China and Europe warned the escalating trade war could trigger a global recession. Citigroup cautioned that investment flows into emerging-market assets will subside, while Morgan Stanley lowered its recommendation toward the asset class, citing the risk of a stronger US dollar and ballooning trade threats.

Investors are increasingly paying heed as the US digs in. After a flurry of tit-for-tat tariffs, Washington is mulling a new front by potentially ratcheting up scrutiny of Chinese investments, according to people familiar with the plans.

Outflows from US-listed exchangetraded funds that invest across developing nations, as well as those targeting specific countries, hit $3.38 billion last week, the most in more than a year.

The implications are familiar.

“A significant slowdown in trade would materially deteriorate the global growth outlook with repercussions for risky assets,” Elia Lattuga, a cross-asset strategist at UniCredit Bank, said in a note dated June 22. Emerging markets would be “especially exposed,” he said.

Bleak Monday: Read more on the view of the trade war from EM While there’s no clear resolution to the fiery trade rhetoric, some money managers are taking a more optimistic medium-term outlook. UBS Global Wealth Management, which reduced its weighting on emergingmarket equities to neutral, said trade risks should wane in coming months and help support a doubledigit rally in the asset class.

There’s limited downside risk to “already very cheap” developing-nation currencies as any nasty surprises from Donald Trump would only prompt a “temporary and very bittersweet sugar high for the greenback,” according to Ashmore Group.

Most major developing-nation currencies weakened against the dollar on Tuesday, with MSCI Inc’s gauge trading down for a second day. Stocks fell 0.4 per cent after a 1.6 per cent tumble the day before.

The Trump administration’s threat last week to impose levies on another $200 billion of Chinese goods has increased the risk of a trade war and led to a “risk-off ” environment in emerging markets, according to Goldman.

“While we have been inclined to discount previous trade rhetoric, we are now taking a more defensive view,” the firm, which oversees more than $1 trillion of assets, said in its fixedincome weekly report on June 22.

Similarly, Credit Agricole is keeping risk-aversion strategies in place, according to analysts led by Valentin Marinov. Emergingmarket central banks would eat through their reserves defending their currencies in a trade war, selling Treasuries and contributing to the US yield advantage, they said. Monetary policy would be complicated as a flight to safety weakened emerging currencies, pushing up inflation in an environment where growth is “dented by decreased trade volumes,” Isaah Mhlanga, an economist at Rand Merchant Bank, said in an emailed note.



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