Goldman Sachs reduces exposure to emerging markets due to tensions between the U.S. and China

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May 16, 2019 1:12pm NYSE:VWO

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From Spriha Srivastava: The investment management arm of Goldman Sachs scaled back its “overweight” exposure to emerging market assets Thursday, amid rising trade tensions between the U.S. and China.

“We have scaled back overweight exposure to EM (emerging market) currencies and EM debt until we gain clarity on the direction of travel for both U.S.-China trade relations and global growth, with the two being interconnected,” Goldman Sachs Asset Management (GSAM) said in a note published Thursday.

Flows into emerging markets can be dependent on cheap capital from the Federal Reserve and are very sensitive to a change in monetary policy in the U.S. Add to that domestic factors such as high current account deficits, weak currencies and a dependence on commodities, these markets can make for a risky investment.

High risk may lead to higher returns, but for now the MSCI emerging markets index has fallen more than 11% over a 12-month period. Meanwhile, the major stock indexes stateside are all down more than 3% this month.

Last week, the U.S. raised tariffs on $200 billion worth of imports from China from 10% to 25%. In addition to this, President Donald Trump indicated that more tariffs will be applied to roughly $300 billion worth of goods imported from China.

China retaliated with tariffs worth $60 billion of goods imported from the U.S. from June 1. “These events mark an abrupt escalation in U.S.-China trade tensions after a period of relative calm since the fourth-quarter of 2018,” GSAM said in a note.

Trade worries were eased slightly on Wednesday after CNBC reported Trump‘s plans to postpone auto tariffs by up to six months. The White House faces a Saturday deadline to decide whether to slap duties on car and auto part imports over national security concerns.

However, this didn’t last long as Trump declared on Wednesday a national emergency over threats against American technology. The U.S. Department of Commerce announced the addition of Huawei Technologies and its affiliates to the Bureau of Industry and Security (BIS) Entity List, making it more difficult for the Chinese telecom giant to conduct business with U.S. companies.

The Vanguard FTSE Emerging Markets ETF (VWO) was trading at $41.10 per share on Thursday afternoon, up $0.15 (+0.37%). Year-to-date, VWO has declined -10.30%, versus a 8.63% rise in the benchmark S&P 500 index during the same period.

VWO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #7 of 97 ETFs in the Emerging Markets Equities ETFs category.

This article is brought to you courtesy of CNBC.

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