Emerging markets are rattled by tariff war

Tariffs are fueling investor anxiety across emerging markets (EM), prompting a shift toward safer assets and adding pressure on currencies and riskier holdings, Bloomberg reports.

Wrecking ball: Societe Generale strategists expect most EM currencies to decline, with China’s CNY projected to see a “modest” depreciation, while South Africa’s ZAR and Latin American currencies could be in for sluggish performance. The “wrecking ball [is] still underway in EM FX, but will slow,” they said.

Optimism is waning: Despite the MSCI EM Currency Index reaching a five-month high last week, investor sentiment remains largely pessimistic due to the ongoing trade war. The Colombian COP and Indonesian IDR led declines among EM currencies last week, while last Monday saw China set its CNY fixing to the weakest level since September 2023 at CNY 7.2038 per USD.

Even a weaker USD wouldn’t help: Any unwinding of the USD will benefit developed market currencies more than EM, according to Goldman Sachs Group strategists, with investors using the selloff to seek out undervalued assets in the US.

The risk-off approach is hitting some more than others: Emerging markets with political instability — such as Turkey, Indonesia, and South Korea — are adding to investor risk-off sentiment. In Turkey, Morgan Stanley projects a weaker TRY by year-end, estimating a USD 10 bn drop in foreign reserves due to tariff-driven outflows. Local FX demand will be key to the country’s reserves outlook, Morgan Stanley analysts Hande Kucuk and Arnav Gupta told Bloomberg.

Oil woes are also inflicting pain: A steep drop in oil prices — triggered by the tariffs — is piling pressure on emerging market oil exporters. Brent crude dropped more than 20% in the week following the April 2 tariff announcement, briefly touching below USD 60 per barrel before rebounding. Oil-dependent economies, including Gulf countries, Nigeria, Angola, Venezuela, Brazil, Colombia, and Mexico, are expected to face a hit to hard-currency revenues, while oil-importing countries are set to see some benefits from the falling prices, according to investors cited by the newswire.

How will EM respond? Trump’s tactics may embolden political leaders to adopt more radical approaches, increasing the likelihood of extreme market swings, said Malin Rosengren, a fund manager at RBC BlueBay. “No doubt we will be seeing more instances across EM of strong man politics testing the limits of the new world order,” she said.

The panic won’t continue for long, though: Rosengren believes that after experiencing volatility for an extended period, investors are likely to fall back on economic fundamentals — like growth prospects, inflation, and interest rates — rather than being overly influenced by short-term political drama or instability.

MARKETS THIS MORNING-

Asian markets are mostly in the red this morning, with Hang Seng (Hong Kong) down 1.6%, Japan’s Nikkei down 0.7%, and Shanghai Composite down 0.6%. Meanwhile, Wall Street futures are inching down after Nvidia announced it will suffer a hefty USD 5.5 bn quarterly charge on its exports to China due to tariffs.

THE CLOSING BELL: TADAWUL-

The TASI rose 0.2% yesterday on turnover of SAR 6.3 bn. The index is down 3.5% YTD.

In the green: Almawarid (+10.0%), SPPC (+9.9%) and SRMG (+6.5%).

In the red: Saudi Cable (-3.6%), Alsagr Ins. (-3.2%) and Sumou (-2.8%).

THE CLOSING BELL: NOMU-

The NomuC rose 0.1% yesterday on turnover of SAR 59.7 mn. The index is down 7.4% YTD.

In the green: TMC (+12.2%), SMC (+7.3%) and Multi Business (+6.9%).

In the red: Alrazi (-9.1%), Lime Industries (-8.5%) and Albattal Factory (-6.6%).

CORPORATE ACTIONS-

Bank Albilad’s shareholders approved a 20% capital increase to raise the bank’s capital to SAR 15 bn from SAR 12.5 bn, according to a disclosure to Tadawul. The SAR 2.5 bn increase will be funded by SAR 1.5 bn from retained earnings and SAR 1 bn from the statutory reserve. It will be executed through the issuance of bonus shares, with one share granted for every five owned, raising the number of total shares to 1.5 mn.

Yamama Cement’s shareholders approved the distribution of a SAR 202.5 mn dividend to its shareholders for FY 2024 at SAR 1.0 per share on Sunday 4, May, it said in a disclosure to Tadawul.

Sure Global Tech’s BoD recommended distributing SAR 11.5 mn in dividends for FY 2024 at SAR 1.5 per share, according to a disclosure to Tadawul. The distribution date is yet to be announced after regulatory and shareholders’ approvals.

Nofoth Food Products received the greenlight from the Capital Market Authority to double its capital to SAR 96 mn, according to a statement. The increase will be funded through SAR 48 mn in retained earrings, and each shareholder will receive a bonus share.