The Trade War Has Hit Emerging Market Equities Hardest
Thus far, the trade war has weighed on emerging equities more than on developed ones.
The chart below shows the annualised average performance of major indices over the period 2018-2019, taking only days following negative trade war-related announcements (dark blue) versus the annualised overall performance of each index over the same period (grey).
The chart takes into account 25 days of negative trade-related newsflow. Key dates include March 1 when President Trump announced forthcoming tariffs on all trading partners of 25% on steel and 10% on aluminium and China’s announcement of retaliatory tariffs on April 2. Another key date is April 3, when the Trump administration released a USD 50 billion list of 1,333 Chinese products under consideration for 25% tariffs. Also notable is May 5, when, in a sudden reversal during the US-China trade negotiations, President Trump tweeted (later officially confirmed) that the US would increase the 10% tariff on USD 200 billion of imports from China to 25%
Emerging assets have had a rough year so far, hitting a year-to-date high of 14% in April, and declining by about 10% since then: a volatile year by any standards. The macro picture for emerging economies, without being excellent, remains positive overall, but there are significant risks, including trade war escalation. Since 2018, days with negative trade war announcements led emerging equities to underperform their developed counterparts by about 20 basis points per day. The valuation of emerging equities may look cheap, but when looking at it from different angles, the overall impression is that their pricing is fair: with a forward PE at 10.5 (and a 2008-2019 average of 10), valuation risk is not off the table.
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