A trader works at the Buenos Aires Stock Exchange in Buenos Aires, Argentina. (Photographer: Diego Levy/Bloomberg News)

End of Bull Run in U.S. Stocks Poses Threat to Emerging Markets

(Bloomberg) -- It’s as if the game were rigged. When U.S. equities rallied earlier this year, emerging-market stocks fell, and when U.S. equities declined in the past month, their developing-nation counterparts tumbled even more.

As U.S. stocks threaten to end a decade-long bull market, the outlook is growing worse for emerging markets, according to Morgan Stanley strategists led by James Lord and Simon Waever. The firm’s cross-asset team is underweight developing-nation shares.

End of Bull Run in U.S. Stocks Poses Threat to Emerging Markets

"Risk off in the S&P means risk off everywhere," said Anastasia Levashova, a fund manager at Blackfriars Asset Management in London. "Any profit-taking in U.S. stocks means a run into the dollar and selling EM currencies and stocks."

Last month, when the S&P 500 Index slid 6.9 percent in its worst monthly decline since September 2011, 15 of the 17 emerging-market equity indexes tracked by Morgan Stanley also fell. Only shares from Brazil and Hungary showed resilience.

End of Bull Run in U.S. Stocks Poses Threat to Emerging Markets

It was a similar story for currencies, with the noticeable exceptions of the Argentine peso, the Turkish lira and Brazilian real. Levashova said they have a temporary advantage after posting some of the world’s biggest losses earlier in the year, driven by domestic headlines. At current valuations, they’re potential havens in the event of a gradual slide in U.S. stocks, she said.

End of Bull Run in U.S. Stocks Poses Threat to Emerging Markets

"If it’s a panic selloff, they will all tank," Levashova said.

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