(Bloomberg) — Emerging-market stocks erased their gains for the year in one of their worst days since the global financial crisis, as the escalating trade conflict fueled a flight to safer assets.
Most Read from Bloomberg
MSCI’s main emerging equity index dropped as much as 8.4% on Monday, its biggest intra-day move since 2008, while an index for emerging market currencies also slipped. Dollar bonds issued by emerging nations sold off and the average cost of hedging against a debt default in the developing world surged to an 18-month high.
“This is indiscriminate selling,” said Xin-Yao Ng, a fund manager at Aberdeen Investments. While cash levels have gone up, “there’s a limit to how much I can increase. Generally I’m required to be invested.”
Sweeping tariff increases introduced last week by President Donald Trump are threatening to sharply slow the US economy, with many economists, including at Goldman Sachs Group Inc., even seeing the risk of recession. The higher levies could also devastate developing nations’ trade and economies, especially as countermeasures kick in.
Beijing which faces some of the stiffest curbs, retaliated Friday with tariffs on US imports. The moves sent Chinese shares in Hong Kong down 13.8% on Monday, putting it into a bear market, while the People’s Bank of China weakened its daily yuan reference rate to a level unseen since December. That’s raised speculation Beijing may resort to devaluing the yuan against the dollar.
Shares across Asia fell heavily, with India’s NSE gauge down 5%, Taiwan shedding more than 9% and Malaysia losing 4%.
“EM equities got a second hit when China announced its retaliatory tariffs on Friday evening. While investors ratchet up their recession probabilities, it would seem too early to increase EM equities,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA.
De Mello said the slide in Treasury yields and a weakening US dollar would eventually be positive for emerging assets “but we need to see some stabilization in recession expectations.”
MSCI’s gauge for emerging-market currencies fell as much as 0.5% for its worst day in two months. The Mexican peso and South Africa’s rand led the losses, with the latter plummeting to its weakest in a year. The Egyptian pound fell more than 2% against the dollar, its biggest drop in a year.
