Emerging markets reeled under selling pressure on Monday (May 6) following a re-escalation in U.S.-China trade tensions as US President Donald Trump said on Sunday that Washington would hike tariffs on $200 billion worth of Chinese goods this week, with further tariffs on $325 billion goods "shortly".
Trump's threat to increase tariffs on China's exports to the US unsettled investors who had been anticipating a trade deal between the world's two largest economies as early as this week.
Optimism over a trade agreement was beneficial during the first quarter of the year with emerging markets stocks producing positive returns and marginally outperforming developed markets.
Another positive driver of sentiment for emerging markets equity was the pause in rate hikes in the US. The Federal Reserve, which held a policy meeting on March 19–20, kept short‑term interest rates unchanged and indicated that it will no longer raise interest rates in 2019. The MSCI EM Index returned 0.86%.
China was a key driver of EM equity returns as it generated the highest return among emerging market countries despite weakening economic growth. Chinese stocks advanced more than 2%, but the Chinese A shares market rose more than 6%, thanks to Beijing’s assurances that the government would continue to introduce supportive policies to counter China's economic slowdown.
China’s economy grew at its weakest pace since 1990. The major cause of the slower growth was the prolonged trade dispute between the US.
The Chinese authorities lowered the full-year growth target to 6-6.5% , down from last year’s 6.6% expansion and outlined a package of tax cuts, infrastructure investment other measures to support bank credit growth. Meanwhile the central bank cut the reserve requirement ratios for banks.
In addition, investors welcomed index provider's MSCI’s plan to quadruple the weighting of China-listed shares in its benchmark indices later this year.
Indian markets which were earlier pressured by military tensions with Pakistan staged a late rally. Stocks advanced more than 9% on optimism that Prime Minister Narendra Modi’s ruling coalition would win reelection in May, raising expectations that the government would spur investment in sectors such as construction and infrastructure.
Stocks advanced in Indonesia and the Philippines where central banks left their benchmark interest rates unchanged at 4.75% and 6.0%, respectively. In Thailand central bank also kept its key rate unchanged but cut its 2019 growth forecast for the second time in three months, to 3.8% from a prior 4.0% estimate. Thai stocks declined.
Turkish stocks sank nearly 15% in dollar terms and the lira lost 5.6% versus the greenback as the government’s policy response to the country’s economic problems continued ahead of March 31 elections. Weak demand and high cost of funding resulted in a challenging macroeconomic environment for companies.
Russian stocks gained about 1%, as higher oil prices and appreciation in the ruble boosted investor sentiment in that market. The country's central bank left its benchmark interest rate at 7.75% for the second straight meeting. Comments from central bank officials indicated that rate cuts were possible as a stronger currency and weak consumer demand helped dampen inflation.
Colombia and Peru led performances in Latin America. Healthy macroeconomic data supported investor confidence in Peru. Both markets ended the quarter with double-digit gains. Brazil lagged its EM and regional peers with stocks shedding nearly 4% as slow progress on social security reform and disappointing 2018 GDP growth data held back the market. In addition, industrial production fell in January, contrary to expectations.
The central bank in Latin America's largest economy cut its 2019 economic growth forecast to 2.0% from a 2.4% estimate in December. In Mexico, where central bank left its key rate unchanged at 8.25%, stocks edged higher. S&P Global Ratings downgraded its outlook for Mexican sovereign debt from “stable” to “negative.” The MSCI EM Latin America Index lost 2.51%.
In South Africa, the central bank left its key rate unchanged at 6.75% as expected, but cut its 2019 economic growth forecast to 1.3% from 1.7% in January due to the impact of a nationwide electricity crisis centered on energy utility Eskom. Earlier in the year, the cash‑strapped state utility was confronted with more than 13 000 megawatts (MW) of unplanned electricity outages. South African stocks shed almost 2%.
Overall, world markets ended the first quarter with equities up for the year but myriad geopolitical and trade issues remain sparking risk‑related selling and derailing markets.