Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

The Donald Trump upset happened, and emerging-market stocks are among the biggest losers amid turmoil across financial assets.

Expect any selloff to be short-lived, however. The reasons are straightforward: There's too much cash out there, and it's the end of the year.

Inverse Correlation
Emerging market stocks tended to drop whenever there were signs that Trump could win
Source: Bloomberg

Some of the biggest funds boosted their cash holdings as uncertainty about the election grew in the closing days of the campaign. Bank of America Merrill Lynch's latest survey of 171 funds holding assets of $443 billion, conducted between Oct. 7 and Oct. 13, showed the highest level of cash since the days after the Sept. 11, 2001 attacks.

That's fear embodied. The issue, though, is that fund managers can't afford to be seen holding an average of 5.8 percent of their money in cash when the year-end reporting period starts -- they're paid to invest, not to hold deposits. So invest they must, and must do so before the second week of December, when liquidity goes on vacation and adding holdings becomes near-impossible. 

This means that the sharp drop in stocks will be followed by fund managers cheerfully putting their cash back into the market.  

The Trump Bet
The Mexican peso has been the favorite punching bag of anyone betting on a Trump victory
Source: Bloomberg

Where do emerging markets stand in that global equation? Well, the BofA Merrill survey also indicated that managers haven't been this overweight stocks in the developing world since early 2013. On average, they held 31 percent more shares exposed to emerging economies than was mandated by the indexes they follow.

Besides, the asset class was perhaps the one reacting most violently to either outcome, given the trade rhetoric expressed by Trump and Hillary Clinton. The MSCI Emerging Markets index was already down 2.6 percent by the time London trading started. It could go further, if recent history is a gauge.

Which also means these stocks will be among the most underpriced and attractive assets in the aftermath. 

Ultimately, then, everything is likely to go approximately back where it was. First, get ready for a bit more pain.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates with election result and latest market move.)

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net