Trump victory triggers rush to shed emerging market assets

Donald Trump’s victory in the US presidential election has sparked a rush to sell emerging market stocks and bonds on a scale not seen since the taper tantrum of 2013, the Institute of International Finance said on Wednesday.

The IIF, a financial industry group, said international investors withdrew more than $24bn from EM assets in November, with cross-border outflows of an estimated $8.1bn from EM equities and $16.1bn from EM bonds.

The IIF said it had recorded only four months of bigger outflows since 2005 when the IIF’s data series began: three at the height of the global financial crisis of 2008-09 and one following the announcement by the US Federal Reserve in May 2013 that it would soon begin tapering its $80bn a month programme of bond buying, or quantitative easing.

The IIF said November’s outflows began immediately after Mr Trump’s election early that month, which caught many investors by surprise.

“The ‘Trump trade’, favouring a strong dollar, higher bond yields and US domestic-oriented stocks, left EM assets notably exposed,” the IIF said in a statement. “Moreover, Trump’s antagonistic stance during the campaign towards trade and immigration issues has weighed on foreign portfolio flows to EMs.”

Alberto Gallo, portfolio manager and head of macro strategies at Algebris Investments, an asset manager, said: “The Trump election created a tantrum in EM stocks and bonds. . . . Populism is inflationary and protectionism can damage global growth. And if you put tariffs on Chinese imports as was in his programme, then China will retaliate.”

Many investors in EM assets have been alarmed since the election by the prospect of higher than expected US inflation, a stronger than expected US dollar against other world currencies, and faster than expected increases in US interest rates.

Several years of low interest rates in the US and other developed markets have driven strong inflows to EM portfolio assets this year, as investors have gone in search of yields no longer available in their home markets. It has long been predicted that a reversal of such long-term loose monetary policies would result in a corresponding reversal of flows out of EMs and back to notionally safer assets in the US and other markets.

The IIF said the prospect of a rise in US interest rates in December — belatedly following the Fed’s initial rate rise in December 2015, its first since the global crisis — were already weighing on EM portfolio flows in October, but that Mr Trump’s election had changed the outlook, resulting in $13bn of November’s portfolio outflows. The other big driver was changed perceptions of domestic factors in individual EMs, the IIF said.

The IIF’s data track cross-border flows by non-resident investors. Separate data from EPFR, which monitors flows into and out of mutual funds and exchange traded funds (not necessarily involving cross-border flows), showed the biggest weekly outflows on record from EM bonds funds in the week to November 16, immediately after the US election, at $6.6bn, with a further $5.4bn withdrawn from EM equity funds.