Trump's "first day," emerging markets "not doing well," breaking several records

On January 20, as Trump began his second presidential term, emerging markets were significantly impacted, frequently showing "broken prices." Among them, the stock market recorded the largest valuation discount on any U.S. presidential inauguration day, and some bond spreads also reached their narrowest levels since inauguration day.

Data shows that the opening price of the MSCI Emerging Markets Index based on expected price-to-earnings ratios was 46% lower than that of the S&P 500 Index, marking the largest gap since Obama's first inauguration in 2009. Although the index rose for the fifth consecutive trading day due to market expectations that Trump would adopt a gradual trade tariff policy, the discount based on the price-to-earnings ratio over the past 12 months still reached 49%, the highest level since Clinton's second term.

In the bond market, the average yield of emerging market local currency bonds was lower than that of U.S. Treasury yields, marking the first time this has occurred in inauguration day data since 2009.

The average credit default swap (CDS) was 163 basis points, the lowest level on inauguration day since the Obama era. The yield premium on dollar-denominated corporate bonds also set a record low for inauguration day since 2005.

In contrast, the valuation of U.S. stocks relative to bonds is at a historical high. Analysts believe that while emerging market bond traders are focusing on absolute yields and accepting narrowing spreads, if the Trump administration triggers a risk-off sentiment in global markets, this low-risk premium could become a pressure point. On the other hand, if Trump's policies lead to a shift in risk appetite, cheap stocks will attract "buying on dips" investors.

Aarthi Chandrasekaran, head of asset management at Shuaa Capital Psc, stated:

"Despite the improving earnings trajectory, emerging market stocks are still 'underweighted' by investors due to U.S. policy actions, a strong dollar, and high U.S. interest rates. On the other hand, emerging market bonds face a tightening credit spread situation. Affected by potential tariffs and ongoing uncertainties, the direction of spreads may tend to widen, potentially triggering a de-stressing trend."

However, benefiting from a weaker dollar and the money market indicating an increased likelihood of a Fed rate cut in July, emerging market assets have shown slight recovery today, with stock indices expected to achieve the largest five-day gain in over three months; currencies have also risen for the fifth consecutive day, led by the South Korean won, Czech koruna, and Thai baht; CDS spreads have narrowed for the second consecutive day.

Chandrasekaran further pointed out, "For investors, the real risk is not the volatility of emerging markets, but the opportunity cost of continuing to focus on the U.S. market."