(Bloomberg) -- Emerging-market stocks index entered correction territory Thursday, the result of a months-long rout brought on by uncertainty over US policies and China’s growth prospects.
The MSCI EM stock index dropped 0.4% and registered a 10% loss since an Oct. 2 high, marking a correction. The slide was led by Samsung Electronics Co. Ltd and Taiwan Semiconductor Manufacturing Co. as new measures planned by the Biden administration are set to expand semiconductor trade restrictions to most of the world.
Heavily weighted by China equities, the index has suffered from steep losses in shares from the world’s second-largest economy as the government’s stimulus package fell short of investor expectations.
A similar gauge for developing currencies fell for a second day as the dollar gained.
Developing-world assets have been in a free fall since beginning October. Despite the start of the Federal Reserve’s monetary easing path, inflation readings have been strong in October and November, leading traders to bet on fewer and lower rate cuts in the coming meetings. Donald Trump and the Republican Party’s election victory have also resulted in higher inflation expectations, pushing 10-year US Treasury yields higher.
Traders have turned even more cautious in the run-up to Trump’s inauguration on Jan. 20, with the outlook for his tariff plans causing wild swings in the market earlier this week.
“There is too much uncertainty with respect to Trump’s intentions to have conviction in either direction regarding risk assets,” said Henrik Gullberg, a macro strategist at Coex Partners. “Markets will be very choppy into the inauguration, and react to Trump’s tweets and commentary.”
Disappointment over China’s stimulus measures and a lackluster start of Chinese stocks to the year have also weighed on sentiment. Chinese tech shares were flat on the day but on track for their biggest weekly decline in seven weeks. Chinese markets were also pressured by data showing the economy is stuck in low gear, with inflation decelerating for a fourth-straight month.
For Greg Lesko, managing director at Deltec Asset Management LLC in New York, stocks from Brazil and South Korea have also helped dragged the MSCI index lower. Those assets have been weighed down by fiscal concerns in Brazil and the impeachment and arrest of South Korea President Yoon Suk Yeol.
“I think the markets will be cautious until we get more policy clarity which should happen soon,” he said. “A lot of very cheap stocks, so we expect good opportunities but will need some patience.”
Goldman Sachs strategists trimmed their forecasts for EM equity returns in 2025, lowering their year-end target for the index to 1190 points from 1200.
However, that still represents a rise from Thursday’s close of 1066 points, with Goldman predicting moderate returns driven by earnings. They highlighted overweight positions in China, South Africa, and Saudi Arabia among others, and upgraded their stance on Turkish stocks.
In currency markets, MSCI’s EM gauge was led lower by the Chilean peso, Mexican peso and South African rand. In the bond market, high-yield dollar debt outperformed, with sovereign notes from Bahrain, Gabon and Lebanon climbing the most. The bond market shut at 2 p.m. New York time in observance of a national day of mourning for former President Jimmy Carter.
Poland sold €3 billion bonds to cover financing needs, contributing to a rush of EM debt sales this year as countries race to secure funding ahead of Trump’s inauguration.
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