Emerging Stocks Climb From Biggest Drop in Two Weeks on Europe

Emerging-market stocks advanced after the biggest retreat in almost two weeks on speculation European leaders will agree on steps to contain the region’s debt crisis.

The MSCI Emerging Markets Index (MXEF) increased 0.6 percent to 959.33 after slumping 1.3 percent yesterday, the largest drop since Nov. 23. The Hang Seng China Enterprises Index (HSCEI) gained 2.2 percent in Hong Kong and Taiwan’s Taiex Index (TWSE) advanced 1.1 percent. Brazil’s Bovespa (IBOV) index dropped for the first day in three, losing 1.5 percent while Chile’s Ipsa rose 1.6 percent. Micex Index fell 0.7 percent in Moscow after protests against election results.

Euro-area leaders may let the region’s temporary bailout fund to run concurrently with the European Stability Mechanism as this would allow almost double the financial firepower to be deployed, the Financial Times said. Nikkei reported that the Group of 20 nations is considering a $600 billion International Monetary Fund lending program to help curb the crisis.

“Equity markets will remain highly correlated to international news and it seems that investors are expecting a big announcement from European countries in the coming days,” Tariq Qaqish, deputy head of asset management at Dubai-based Al Mal Capital, said by e-mail.

German Chancellor Angela Merkel’s government is more pessimistic about the outcome of the European Union leaders’ summit in Brussels beginning tomorrow, a government official told reporters in Berlin today, on condition of anonymity because the negotiations are private. Not all EU members appreciate the seriousness of the situation, the official said.

‘Too Optimistic’

MSCI’s emerging-market index has dropped 17 percent this year as concerns over the European debt crisis and U.S. economic growth prompted fund managers to seek less risky investments. Companies in the index trade at 8.5 times estimated earnings, less than the average multiple of 9.8 for developed markets (MXWO), according to data compiled by Bloomberg.

Emerging-market stocks will probably trail advanced-country shares next year because companies in developing nations are producing less cash and investors are too optimistic about the prospects for government stimulus, Deutsche Bank AG said.

“We expect cash flow to come under increasing pressure” in emerging markets, John-Paul Smith, a London-based strategist at Deutsche Bank, wrote in a report dated yesterday. “Investors generally appear too optimistic about the prospects for monetary and fiscal easing within the emerging economies,” he wrote, without giving a forecast for equity returns.

The Bovespa fell the most in two weeks as steelmaker Usinas Siderurgicas de Minas Gerais SA dropped 3.9 percent and mining company Vale SA (VALE5) lost 3.6 percent, following metals prices lower. The MSCI Brazil/Materials index tumbled the most among ten industry groups.

Brazil, China

Gol Linhas Aereas Inteligentes SA, Brazil’s second-largest airline by market value, rose 3.6 percent to 15.50 reais, the highest since July 27. Delta Airlines Inc., the world’s second- biggest carrier, agreed to buy a stake in Gol for $100 million.

Chinese companies listed in Hong Kong climbed before a report on Dec. 9 that’s expected to show China’s inflation slowed to a 13-month low of 4.5 percent last month.

China Overseas Land & Investment Ltd. (688), the biggest mainland developer listed in Hong Kong, climbed 2.1 percent on speculation China’s central bank will cut interest rates next year. Industrial & Commercial Bank of China Ltd. (349), the nation’s largest lender, rose 2.9 percent.

Hyundai Development

South Korea’s Kospi Index (KOSPI) advanced 0.9 percent, led by builder Hyundai Development Co. (012630), which jumped 7.9 percent after the government said it will cut transfer taxes on owners of more than one house and will lower interest rates on loans for first- home buyers.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries rose two basis points, or 0.02 percentage point, to 404, according to JPMorgan Chase & Co. (JPM)’s EMBI Global Index.

OAO Lukoil, Russia’s second-largest oil company, fell 0.9 percent in Moscow and OAO Gazprom, the largest natural gas exporter, also fell 0.9 percent, as the Micex slid for a second day amid protests.

Russian police said they detained about 300 people yesterday at a rally in downtown Moscow to protest the results of the Dec. 4 parliamentary elections.

“People were not used to looking at Russian politics in this way before so they don’t know what to think and rather want to be on the sidelines,” Clemens Grafe, chief economist at Goldman Sachs Group Inc. in Moscow, said in an e-mail.

Prime Minister Vladimir Putin’s United Russia party won 49.3 percent of the votes, compared with 64.3 percent four years ago.

The Chilean peso appreciated 0.8 percent against the dollar, the best performance among 25 emerging market currencies tracked by Bloomberg, after the National Statistics Institute said annual inflation rose to the highest since April 2009. Most currencies from developing markets rose, while the Indian rupee dropped 0.6 percent.

To contact the reporters on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net; Zachary Tracer in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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