Financial markets across many developing nations are struggling to attract capital amid the ongoing trade stand-off between China and the US. The most recent round of escalation, America\u2019s 25 percent tariffs on $200 billion worth of Chinese goods, sparked another rout in emerging market stocks this outgoing week.<\/p>\n
This, in turn, threatens to undermine investor confidence in developing nations, particularly, in the non-financial sector, which could reduce their broader gross domestic product growth prospects.<\/p>\n
According to the MSCI Emerging Markets Index, stock markets across most prominent developing nations declined by an average of 3.7 percent this month so far. A majority of investors are citing these nations\u2019 exposure to trade with both the US and China.<\/p>\n
They say higher tariffs and a regulatory crackdown on bilateral trade on both sides of the Pacific will have significant spillover effects for third-party countries, the majority of them in the developing world.<\/p>\n
Another concern is that investors don\u2019t expect a trade agreement between the US and China to be concluded anytime soon. There is little clarify of either side\u2019s plans, and contradictory reports make the situation even more uncertain.<\/p>\n
\u201cThere are no deadlines,\u201d Alejandro Cuadrado of the New York branch of BBVA Compass Bancshares Inc.<\/p>\n
\u201cEmerging currencies are starting to be quite cheap, but demand will be limited with uncertainty and the fact that even when we were pricing more benign scenarios, they didn\u2019t perform.\u201d<\/p>\n
Indeed, a handful of emerging market currencies have either devalued over the past few months, or are facing downward pressure against their major peers \u2014 due to the reduced availability of investment capital, and the rising US borrowing costs.<\/p>\n
However, cheaper stocks and weaker national currencies make emerging nations more competitive in international trade. The problem is, the threat of disruptions in global trade makes the exchange in goods and services a riskier, and less profitable, endeavour, with many companies reducing their supply chains and seeking domestic substitutes to cut exposure.<\/p>\n
Meanwhile, one of the leading global financials, Goldman Sachs Asset Management, recently rolled back their holdings of emerging market bonds and currencies, citing the trade tensions as well. Goldman said it would consider returning to emerging markets after the China-US tensions subside.<\/p>\n
\u201cWe have scaled back overweight exposure to EM currencies and EM debt until we gain clarity on the direction of travel for both US-China trade relations and global growth, with the two being interconnected,\u201d Goldman experts said in a note.<\/p>\n
This might suggest clouds could be gathering over countries excessively reliant on external borrowing or foreign trade. For example, the ongoing economic recessions in Argentina and Turkey started with crises in their respective national currencies last summer.<\/p>\n
Both countries had significant public and private debt in US dollars, and when US interest rates went up, Argentine and Turkish economies went down.<\/p>\n
US-Chinese trade tensions are threatening to repeat that scenario in other, more sustainable, emerging markets.<\/p>\n
\u201cWe continue to see the near-term risks for emerging markets as tilted to the downside, and the risk of additional tariffs being implemented is rising,\u201d a team of Morgan Stanley experts led by James Lord said in a note.<\/p>\n
However, some experts believe the majority of emerging markets will remain stable until \u2014 and unless \u2014 the US-China tensions escalate into a full-fledged trade war. That scenario appears to be unlikely as of yet, and economists believe the ongoing \u2018low-key war of attrition\u2019 won\u2019t take a huge toll of emerging market countries.<\/p>\n
\u201cThe latest escalation in trade war tensions between the US and China is merely a negotiating tactic to extract concessions ahead of a deal,\u201d Jane Brauer and Lucas Martin of Bank of America Merrill Lynch said.<\/p>\n
\u201cWe think emerging market spreads will not widen much more while markets wait for the outcome of the negotiations.\u201d<\/p>\n
For their part, Goldman experts say some emerging markets still have lucrative investment opportunities in sectors not affected by the US-China dispute.<\/p>\n
Still, rife uncertainty surrounding the future of trade between the world\u2019s two largest economies is weighing on investor sentiments worldwide. Some market participants believe there could be more volatility to come while many developing nations are lacking sources of growth if cut off foreign borrowing and investment going forward. (SPUTNIK)<\/p>\n","protected":false},"excerpt":{"rendered":"
Financial markets across many developing nations are struggling to attract capital amid the ongoing trade stand-off between China and the US.<\/p>\n","protected":false},"author":3,"featured_media":1999,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_FSMCFIC_featured_image_caption":"","_FSMCFIC_featured_image_nocaption":null,"_FSMCFIC_featured_image_hide":null,"footnotes":""},"categories":[20],"tags":[70,48],"yoast_head":"\n