Right, so on Thursday we noted that mom and pop’s favorite emerging market vehicle, EEM, had its worst day since the December Fed hike and before that, its worst day since Donald Trump ascended to the presidency.
Needless to say, the overnight action didn’t exactly suggest that the outlook is going to improve going forward and it certainly didn’t help when, bright and early this morning, Trump told everyone he was “locked and loaded” after sniffing one too many lines of Fox & Friends.
Perhaps the best way to visualize this situation is simply to look at the Bloomberg story count for “nuclear”:
Well, one person who thinks emerging markets are likely to bear the brunt of the pain going forward is former trader Mark Cudmore.
His latest can be found below…
During acute periods of risk-aversion, positioning dominates fundamentals. This is why some of the best structural investment stories can see the most painful corrections in the short-term.
- Emerging-market assets have been the rampant outperformers of 2017. The macro fundamental arguments for the vast majority of these assets remain in place: solid growth, high real yields, very cheap currencies, great demographics, an exploding middle- class, and exposure to a booming Chinese economy
- These are all long-term factors though and they provide little protection in a financial asset storm. Investors’ focus becomes dominated by risk-management and the profit-and-loss bottom line. Everything else is secondary
- The VIX has bounced to the level where it topped out in both April and May. Does that imply this current risk-aversion is almost over already? Not likely. Precisely because investors have been trained by the market resilience to not panic nor aggressively reduce exposure during corrections — and that’s the reason they’ll be playing catch-up this time
- That lesson, to pause before reacting, has been particularly clear in EM, where the cost of chopping and churning is more expensive due to lower liquidity and wider bid-ask spreads
- EM market financial supports are being taken out left, right and center. Global equity markets, credit markets and even commodities are now getting hit. If that wasn’t doing enough damage to reduce risk appetite, the heightened prospect of a nuclear exchange will be in all the weekend papers
- For the two decades up to and including 2016, every single calendar year brought at least a 10% correction in the MSCI Emerging Markets Index. Why would 2017 be any different, especially when there are real reasons to worry?