Investing in Mexico, China and other emerging markets has never been for the fainthearted. Big swings have been a hallmark, caused by everything from the 1994 "tequila crisis" where Mexico devalued the peso to Russia's default on its debt in 1998.
Here's the latest addition to the list: Donald Trump's victory on Tuesday, which some analysts are calling an "orange swan" event for emerging markets. Trump's election was unexpected, and investors were unprepared for it — the kind of event that economists liken to seeing a black swan for the first time — and it has caused stock markets to tumble from Mexico City to Seoul. As investors try to piece together what a Trump presidency will mean for stocks, a growing consensus is that emerging markets will be some of the biggest losers, at least in the short term.
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Funds devoted to emerging market-stocks tumbled after the election, even while stocks in the United States were surging. The largest exchange-traded fund that tracks emerging-market stocks sank 2.6 percent Wednesday, when the S&P 500 index of U.S. stocks jumped 1.1 percent. Vanguard's FTSE Emerging Markets ETF fell another 2.9 percent Thursday, while the S&P 500 added 0.2 percent.
The fear coursing through emerging markets is that Trump will follow through on his rhetoric from the campaign. More open trading rules kept factories whirring in Mexico, China and other emerging markets, and the resulting growth helped those countries build up their own middle classes, which created more new customers for companies in emerging markets and elsewhere. But Trump has talked about pulling back from trade deals.
That's why export-heavy emerging markets have seen some of the biggest declines recently. South Korean stocks lost 3.5 percent on Wednesday in dollar terms, and Taiwanese stocks fell 3.1 percent, according to MSCI indexes.
The U.S. is Mexico's largest trading partner, so trade restrictions would hurt it as well. It faces additional pressure from Trump's calls to build a wall along Mexico's border — at its expense — and for the deportation of immigrants living in the U.S. illegally. That could cut off a lot of remittance payments headed back to Mexico from workers in the U.S. Mexican stocks lost 9 percent in dollar terms Wednesday.
Besides the possibility of a trade war, emerging-market investors are also worrying about the ramifications of a stronger dollar and higher U.S. interest rates that could arise from a Trump presidency.
Weaker emerging-market currencies hurt investors counting their returns in U.S. dollars because they make each rand's worth of South African stock worth fewer dollars. And the rand has lost more than 5 percent of its value against the dollar since election day. The Mexican peso is at a record low.
A stronger dollar also adds pressure on emerging-market central banks to raise interest rates to support their faltering currencies. It at least gives them pause if they want to cut rates in hopes of boosting their economies.
The big losses in recent days are a sharp turnaround from earlier this year, when emerging-market funds were among the hottest investments. The Vanguard FTSE Emerging Markets ETF returned more than 19 percent through early September, for example, and investors poured $18.4 billion into emerging-market stock mutual funds and ETFs during the first eight months of the year.
But the recent struggles are also just the latest turn in the whiplash love-hate cycle that investors have had with emerging markets. Stocks from developing economies are among the riskiest investments to own, and they have often followed up big gains with big losses.
Of course, the recent losses come with the big caveat that a President Trump may not be able to follow through on all his campaign rhetoric. Many Republicans still say they support the idea of free trade, for example.
That high degree of uncertainty is one reason why Wasif Latif, head of multi-global assets at USAA, suggests investors take a breath and hold steady despite the tumult. He's not paring back on the emerging-market investments held in the mutual funds he oversees, including target-date retirement funds.
Emerging-market stocks looked to be some of cheapest in the world, based on their prices relative to their earnings, and the recent declines make them look only cheaper.
"The markets sometimes discount things too much, too quickly, at the Nth degree, and usually what ends up happening is the reality is somewhere in between," Latif says. "We are not jumping to conclusions about what's happening, and I think we need to take a slower, wait-and-see approach to see what the policies are. Then, we'll know what the real impacts are."