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Opportunity in emerging markets following Trump victory

Published: 08:46 14 Nov 2016 GMT

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A glance at the above chart of the FTSE 1000 shows it was a remarkable week for equities, which was dominated by events in the US. A brisk flight to safety followed the shock news that Donald Trump would be the next US president, although these positions were quickly unwound following Mr Trump’s first speech as president-elect.

The powerful rebound took the Dow Jones Industrial Average to a record peak on Thursday, as investors construed that the prospect of fiscal stimulus under Mr Trump was likely to be positive for stocks and the US economy, albeit with some caveats.

There is clearly a greater focus on fiscal spending in the US under a Trump presidency and in the UK after Brexit, facilitating a further ‘goldilocks’ scenario where equities are likely to benefit from being the preferred asset class.

Nevertheless, the lack of visibility regarding the new US economic policies makes it dangerous to extrapolate this week’s momentum and markets are likely to remain choppy over the coming weeks. Longer-term, however, I believe investors will come to realise that a Trump victory will not be as bad as feared, as he struggles to pass various new reforms, which in turn should benefit equities as reality trumps fearful expectations.

There was little news on a domestic front other than concerning official data that echoes reports from builders and construction-material suppliers of growing economic uncertainty following the vote to leave the EU. Official figures showed output in the construction sector, which accounts for 6% of the UK economy, slipped by 1.1% in the third-quarter, marking its worst quarter for four years.

Technical analysis of the FTSE 100 shows that the steady uptrend that was in place since June, gave way in October and trading thus far in November has been choppy. Support was found from both the historically significant level and 200-day moving average at 6650, while resistance was encountered from the 50-day moving average at 6930, creating a wedge formation.  The oscillators are giving little away, but given the bullish divergence, I believe the FTSE 100 will form a base around 6650 before climbing higher.

In conclusion, it was a volatile week for equities, but the UK’s shock vote to leave the EU meant investors were better prepared for a surprise outcome this time and were quicker to reposition afterwards. While it is too soon to sound the all clear on political risks, I believe Mr Trump’s bark may be louder than his bite, as history shows us that even the best presidents fail to adopt more than one of two major policy changes during their tenure. As Trump does less than markets fear, it should provide a positive surprise for equities. 

Financial and pharmaceutical stocks were among the best performers amid hopes that both sectors would benefit from lighter regulation than might have been the case had Hillary Clinton won the election.

Meanwhile, emerging markets were among the hardest-hit as Mr Trump pledged on the campaign trail to pull America out of the Trans-Pacific Partnership, brand China a currency manipulator and build a wall along the border with Mexico. The MSCI Emerging Markets index lost over 6% last week, despite positive macro-economic data from the region.

Emerging economies are, however, on a stronger footing now compared with three years ago during the so-called taper tantrum when then Federal Reserve Chairman Ben Bernanke’s signal to reduce monetary stimulus sent a shock wave through global markets.

Economic growth is picking up this year for the first time since 2010 with Brazil and Russia digging themselves out of recessions, the International Monetary Fund estimates. Foreign reserves have increased in countries including Indonesia and India, providing them with ammunition to defend their currencies.

Solid manufacturing data suggested a sustained economic growth upswing in several countries, as purchasing managers’ indexes for the region rose by 0.3%, led by a 1.3% rise in Hong Kong as Chinese October manufacturing grew faster than predicted. Elsewhere, Indian output hit a two-year high, while Russian and Turkish numbers were the strongest in four years and eight months respectively.

China's economy showed further signs of steadying, as fixed-asset investment quickened slightly and beat expectations in January-October as the government stepped up infrastructure spending to support growth. The Chinese economy expanded at a steady 6.7% in the third quarter and looks set to hit Beijing's full-year target, fuelled by stronger government spending and a buoyant property market.

Given the limited impact Mr Trump can have, I perceive the recent sell-off in emerging markets as an opportunity to buy in to a region that is starting to gain some traction. Rather than buy into a fund manager and their associated costs, my preference would be to buy the iShares MSCI Emerging Markets ETF (Epic: EEM), which seeks to track the investment results of circa 844 emerging market equities and only costs circa 0.69% per annum.

The chart of iShares MSCI emerging markets ETF shows that following a steady uptrend for much of 2016, the index tracker has lost almost 10% in the past week. Historical support was found at 3400p and given the acutely oversold oscillators, I believe further downside may be limited.

At the time of writing the ETF is priced at 3458p, which I believe provides an attractive medium-term buying opportunity for investors. Targets are seen at 3613p, 3734p and 3976p, while traders may wish to consider a stop-loss below support at 3355p to minimise risk.


This report was written by Michael Allen, equity specialist. The writer does not hold a position in iShares MSCI emerging markets ETF. The material in this report has come from web-based data sources and iShares’ corporate website.

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