Now that the US mid-term elections are behind us, it is a good time to reflect on the potential implications for an asset class that might not spring to mind: emerging markets equity. To appreciate the effect of the US elections on emerging markets, it is necessary to take a step back and review the issues affecting the asset class. On the back of surging earnings and global synchronized economic growth, emerging markets soared in 2017, with the MSCI Emerging Markets Index (USD) up 37% in a market driven by growth and momentum.
The domestic equity markets fell sharply in October amidst high volatility, with big swings day to day, and in some cases, intraday. After leading the way up over the last six months, the growth indices led the way down in the reversal, driven by steep losses in the largest technology names, such as Amazon and Netflix, both down roughly 20%. The pullback in the month appears to be a reassessment of risk and some of the lofty valuations reached by these technology companies.