Matein Khalid
The selloff in emerging markets FX before Trump granted a 30 days reprieve to Canada/Mexico on his 25% tariff threats created multiple trading opportunities. I would stay away from Mexican peso as it is easily the most liquid, most shortable currency in the EM FX constellation. The Sherlock Holmes dog that did not bark in this case was the measured ping pong on tariffs with China, the reason why the spike in volatility on the offshore yuan has reversed.
The macro stars for EM are still iffy, even if China posts history’s biggest trade surplus at $1.2 trillion beyond the wildest dreams of Germany or Japan when they were the planet’s export colossi. The 10 year US Treasury bond yield has risen to 4.5% on Wall Street inflation angst. Hurricane Elon and the DOGE Gang have gone ballistic in Washington and Trump 2.0 can well trigger a black swan event in the global markets a la August 5th at any time with a Presidential midnight tweet. There is no way the Powell Fed can cut interest rates amid this Trumpian chaos.
Emerging markets were the sad sack asset class for the past decade and 2024 was no different. The MSCI EM was up only 5%, grossly underperforming a Wall Street obsessed with the AI mania and the Mag-7 megacaps. You know that the asset class has a big problem if you have to depend on Pakistan, Kenya and Sri Lanka equities to have a double bagger year while the Godzillas like China, Brazil and India remain in the merde house/uninvestable.
King Dollar has checkmated the currencies of even traditional EM darlings as the swoon in the Indian rupee and the Brazilian real attests. Thank God that Trump did not escalate/lock horns with Beijing on the 60% tariff threat he promised during the election campaign since the PBOC could have led the Chinese yuan tank and precipitated intercontinental contagion a la the Asian flu in 1998.
The harsh truth is that MSCI EM has trailed the S&P 500 index for 11 out of the past 12 years and its fate in 2025 is also at the mercy of Tariff Man’s whims. J.P. Morgan’s EM FX index has lost money against the dollar for seven successive years and S&P 500 index has delivered 10 times the pathetic returns of the MSCI EM index in that time period. Frankly, my best EM trades have been strategic shorts even though I am constantly seeking opportunities to pick winner stocks from Dalal Street to McLeod Road, from the banks of the Bosphorus in Istanbul to the Argie Bolsa in Buenos Aires and KSA tracker in New York, now at 15X. When Lula is trounced by Eduardo Bolsonaro, as Elon rightly predicts, I expect a 100% pop in Brazil. Nigerian banks at 2X earnings are high risk but super yummy.
Fairytales and nightmares are recurrent themes in EM. The next big macro shock is in EM debt since sov credit spreads are razor thin and dozens of countries will default on the $29 trillion debt binge in the past decade. No wonder the smart money is bailing out of EM debt pronto, watch out!
Also published on Medium.
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