Emerging market stocks have sunk into correction territory, and they may feel further pain as the fundamental backdrop for owning them has gotten sapped.
The large emerging markets-tracking ETF, the EEM, has fallen over 11 percent since its Jan. 26 high; that's also when U.S. equity markets peaked this year.
Its move was more or less sideways, and then down, as the ETF's losses have amounted to 7 percent in the last three months alone. We see three reasons for this.
Slowing global trade
Global trade is showing signs of slowing, and that has been the resounding support for this trade. The World Trade Organization last month published estimates suggesting a slowdown in the second quarter, even before tariff considerations.
King dollar
The U.S. dollar has strengthened considerably, turning in a headwind for emerging market economies selling goods abroad. Sales growth has been slowing from a peak of 13.26 percent in the third quarter of 2017 and is expected to continue slowing into year-end.
Geopolitical unrest
Geopolitical tensions and policy concerns, particularly around tariffs, have sent shockwaves of volatility back into the markets, another headwind for emerging markets. Their forward multiples, meanwhile, have fallen on market uncertainty, led by China.
Ultimately, while the U.S. may yet weaken from here and the volatility may settle, the broader fundamental story tells us the biggest reason to own emerging markets is now behind us.
