Donald Trump's victory hits emerging markets hard

Emerging markets (EMs) equities and currencies have seen a sharp fall since Donald Trump’s surprise victory in the US presidential elections on November 8. Given its high linkages to the US, Mexico has suffered the worst blow, followed by Brazil and South Africa. 

Despite relatively low exposure, India has been the fourth-worst performing EMs globally and the worst-performing EM in Asia having corrected 7.5% in dollar terms. High inflation expectations following Trump’s victory have led to an increase in US bond yields, which has dulled the appeal of EMs and triggered a sell-off from overseas investors.

In the seven sessions after the US election results, foreign investors pulled out $1.5 billion from India. Besides Trump’s victory, the demonetisation drive is also responsible for the fall. The government’s move to recall Rs 500 and Rs 1,000 notes is seen as a major negative for the markets and the economy in the short term.