Emerging markets stocks are set for their worst monthly decline since January as investors price in higher odds of a Trump win in the upcoming US election.
The slump comes as the market is factoring in the potential impact of Trump’s proposed trade policies, including raising import tariffs to as high as 20% and up to 60% for China. Investors are bracing themselves for a potential trade war, which could have far-reaching consequences for global markets.
The MSCI Emerging Markets Index fell 3.1% on Thursday, marking a fourth consecutive day of declines. The index is on track for its worst monthly performance since January, with a decline of over 4%.
Samsung, Alibaba, Tencent, and Meituan, which account for more than half of the index’s weight, have taken the biggest hits. The decline is also being driven by rising geopolitical tensions in the Middle East and a bond market sell-off, which is pushing investors away from riskier assets.
The shift in sentiment is evident in the latest data from the crypto betting market Polymarket, where Trump’s odds of winning have soared to 66%, their highest since July. While polls are showing a much closer race, with Trump and Harris neck-and-neck, investors are clearly pricing in a Trump victory.
Trump’s trade policies have been a major concern for investors, who fear that a protracted trade war would be devastating for the global economy. In 2018, Trump’s trade war with China led to a significant underperformance compared to US stocks, and analysts are warning that a repeat could be catastrophic.
“This is a significant change in investor sentiment, and investors’ risk budgets have likely been changing as a function of that,” said analysts from Citi in a recent note. “US elections have become a key driver of uncertainty, and we are seeing a more cautious stance emerging.”
The fear is that a Trump win could lead to a sharp sell-off in emerging markets, which have already suffered from a lack of direction in recent weeks. Add to that the disappointment with China’s stimulus measures, which initially fueled a rally in EM stocks last month, and you have a perfect storm brewing.
As investors await the outcome of the election, they are likely to remain cautious, at least until the uncertainty is resolved. For now, the outlook for emerging markets looks ominous, with a potential trade war looming on the horizon.
