Emerging-market stocks are witnessing their poorest January performance since 2016, with sentiments dampened by increasing uncertainty surrounding the Federal Reserve’s monetary policy and geopolitical events. Traders are eagerly awaiting insights from a speech by Fed Governor Christopher Waller, while markets grapple with potential geopolitical shifts, including events in the Middle East and the anticipation of Donald Trump’s potential return to the White House.
MSCI Inc.’s index of developing-nation stocks recorded a 1.3% drop on Tuesday, the most in nearly two weeks, reaching its lowest level since December 14. This decline extended January losses to 4.1%. The currency index was led lower by Thailand’s baht and Poland’s zloty as the dollar strength gauge rose to a one-month high.
Guillaume Tresca, emerging-market strategist at Generali Investments in Paris, attributed the downturn to a dollar-driven move and suggested a possible recalibration of US rate cut expectations. Despite the challenging start, Tresca noted the potential for a rebound, comparing the current situation to previous instances in 2016 and 2009.
In 2016, a January slump followed the first Fed rate hike in nearly a decade, causing a brief capital flight from riskier assets. However, investors soon pursued cheaper valuations, sparking a two-year, $8.3 trillion rally in emerging-market stocks. A similar scenario unfolded in 2009 when concerns over the global financial crisis led to a continued sell-off in emerging-market stocks. As the US initiated a bull market and global sentiment improved, the MSCI gauge surged 75% higher over the year.
Investors are closely monitoring several developments, including attacks on ships in the Red Sea and China’s consideration of a 1 trillion yuan ($139 billion) new debt issuance to finance key projects. In central and eastern Europe, bond investors are preparing for potential political turmoil and overspending, which could temper gains in 2024 amid a busy election season and significant budget deficits.
