IN INVESTMENT terms, 2018 is shaping up to be a challenging one for emerging markets, which have faced something of a perfect storm in recent months, seeing their currencies and stock and bond markets buffeted by capital outflows.

The MSCI Emerging Markets Index of developing world shares has made a negative nine per cent return in US dollar terms year to date, marking a major reversal in fortunes after surging by more than a third in 2017.

So what’s rattling the emerging markets?

A major factor at play has been trade tensions between the US and much of the rest of the world. President Trump was elected on an America First programme that included addressing what he perceives to be unfair trade imbalances. In recent months the sabre rattling has escalated significantly.

On top of implementing tariffs on steel and aluminium imports to the US from even close allies, on July 6 the US implemented 25% tariffs on a list of Chinese goods with an import value of $34 billion. In retaliation, China has imposed its own 25% tariff on 545 US goods, also with a total value of $34bn.

The stakes were again raised this week, with the US releasing a further list of Chinese imports that could be hit with a 10% tariff. Chinese authorities have pledged to respond in kind.

While the actual tariffs implemented so far are estimated to have a marginal impact on economic growth, the risk of this spiralling into a full-blown trade war has unnerved markets. America’s maverick, wheeler dealer president may be underestimating the resolve of the Chinese not to lose face.

But emerging markets are facing other headwinds. Another major factor has been a strengthening of the US dollar on the back of monetary tightening by the US Federal Reserve Bank, which has been steadily raising interest rates and is expected to do so twice more this year.

The consequences of a stronger dollar and rising US bond yields are particularly painful for emerging markets because during the era of very low US interest rates emerging market governments and corporates took advantage by issuing significant amounts of dollar-denominated debt.

As the dollar has surged, the cost of servicing the interest payments on this debt has risen too. As US bond yields have spiralled higher, international capital has been flowing out of emerging markets back to the US, putting pressure on emerging market central banks to raise their own interest rates, as Argentina and Turkey have had to.

A third cloud hanging over the emerging markets has been signs of a renewed economic slowdown in China resulting from steps taken last year to curtail the rapid growth of debt in the country.

Gloomy sentiment towards China has not been solely confined to international investors - its own domestic stock markets are now officially in bear territory, with the Shanghai stock market tumbling by 28% since late January.

In recent weeks the People’s Bank of China has turned the taps of support back on, releasing over $100bn of credit for banks to lend to businesses, but this has yet to calm investors’ concerns.

Of course, for those with nerves of steel and a long-term time horizon, investing when sentiment has turned despondent can prove a canny strategy. In an environment dominated by trade anxieties emerging market shares are trading at a very significant discount to their developed markets peers. That’s not say things couldn’t get worse before they get better, but a lot of bad news that may not come to fruition does seems to be reflected in prices.

For those prepared to take a long-term view, drip feeding money into emerging market funds over the coming months could provide an attractive entry point into a set of economies that are growing at a faster pace than the developed world, represent most of the global population but still make up a relatively small proportion of overall world markets.

Jason Hollands is managing director of wealth manager Tilney.