Investors have continued to reduce their exposure to emerging market (EM) equity funds through the early part of the year. But the extent to which sentiment towards EMs is interwoven with the impact of the “Trump trade” is difficult to gauge. It could simply reflect growing uncertainties over near-term economic prospects for the Bric nations (Brazil, India, Russia and China).
In the US, the prospect of deregulation is set against the potential inflationary effects of tariffs, and while China’s economic activity accelerated more than expected in the final three months of 2024, providing minor respite for EM indices, there can be no doubt that the US economy is demonstrating more verve than its chief rival at the moment.
Indeed, China’s economy continues to exhibit deflationary effects despite the consensus beat, with consumer, producer and export prices all still shaky – analysis from UBS indicates that China’s export prices are down by 18 per cent from their post-Covid peak, a partial reflection of excess capacity in the economy. EM economies account for the lion’s share of the US trade deficit, although it’s debatable whether this has been adequately priced in as yet.