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What's going on?
Not every investment has benefitted from Donald Trumps victory last week: emerging market (EM) currencies continued to sell off on Monday.
What does this mean?
EM currencies are being hit by a cocktail of factors. For one, investors are nervous that Trump will enact higher barriers to trade with the US. Pretty clearly, thats bad for EM countries that sell stuff to America. But also, many EM countries have borrowed lots of US dollars over the past decade or so – and most havent made enough money to pay their debt back in full. These countries will likely want to borrow more US dollars in the future (if only so that they can pay back their existing debt). But, in the wake of Trumps election, interest rates in the US have gone up as bond prices have gone down (read our previous story for background). The interest rates that EM countries must pay to borrow US dollars are closely tied to US interest rates – and thus its getting more expensive for EM countries to borrow money. This makes it tougher for EM countries to pay back their existing debt (and, therefore, makes them a less attractive investment).
Why should I care?
For markets: International investors that own EM stocks and bonds are feeling the pain of the currency sell off.
International investors that own stocks and bonds in a particular country are usually exposed to the value of that countrys currency. As the local currency sells off relative to, say, the US dollar, a US-based investor loses money.
The bigger picture: Many investments that were popular earlier this year have reversed course since Trumps election.
Like EM investments, government bonds of developed countries and stocks of tech companies were having a pretty good year prior to Trumps election. But those investments, and others, have reversed course since. While there is certainly some Trump-related logic to the moves, the sharp market reaction suggests that many of the popular investments had simply gone up too much in price relative to their actual value (e.g. investors got carried away with the momentum).
Originally posted as part of the Finimize daily email.
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