Emerging-market stocks dropped the most in more than 20 months, currencies weakened and government borrowing costs rose after China’s cash crunch worsened and the Federal Reserve said it may reduce monetary stimulus this year.
The MSCI Emerging Markets Index slid 4 percent to 908.49, capping the biggest decline since September 2011. Its 10-day volatility rose to an 11-month high. Turkey’s benchmark stock index lost 6.8 percent, entering a bear market, led by banks. Twenty two out of 24 developing-nation currencies tracked by Bloomberg fell as the Turkish lira and India’s rupee hit record lows. South Africa’s bonds yields surged and the rand fell a fifth day. Brazil’s Ibovespa rebounded from a four-year low.
Fed Chairman Ben S. Bernanke said yesterday the central bank may start reducing bond purchases and end the program in 2014 should risks to the U.S. economy abate. China’s benchmark money-market rate climbed to a record and a private report showed manufacturing shrank at a faster pace this month. Funds investing in developing-nation assets saw outflows of more than $19 billion in the three weeks to June 12, the most since 2011, according to EPFR Global.
“There’s been this terrible confluence of events,” Brian Jacobsen, who helps oversee $221.2 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said by phone. “There’s the continuing saga in China. You had a lot of footloose capital flowing to some emerging markets, and now as the Fed announces they might start tapering, suddenly we see a reversal of a lot of those flows.”
All industry groups in the MSCI Emerging Markets Index fell at least 2.7 percent today, led by gauges of financial and utility companies. The selloff sent valuations of shares in the developing-nation index down to 9.4 times 12-month estimated earnings, an 11-month low. Shares in the MSCI World Index of developed markets are valued at 12.9 times projected profits.
The iShares MSCI Emerging Markets Index exchange-traded fund slid 4.5 percent to $36.88, a one-year low. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, surged 34 percent, the most since August 2011, to 35.48.
The MSCI emerging markets index has tumbled 14 percent this year on bets the Fed will end the flood of cheap money that spurred investors to pour $3.9 trillion into developing nations during the past four years. Slower economic growth in China, violent protests in Turkey and widening current-account deficits in Brazil and Indonesia have also fueled capital outflows.
The decade-long outperformance of developing-nation assets “is probably over”, according to Dominic Wilson, the chief markets economist at New York-based Goldman Sachs Group Inc., who predicted the rise of the biggest emerging markets in 2003.
The five trends that spurred outsized gains during the past 10 years -- surging growth in the so-called BRIC nations, higher commodities, improved government finances, slower inflation and lower U.S. bond yields -- are halting and in some cases reversing, Wilson wrote in a report dated yesterday.
“After 10 years of solid inflows into emerging-market debt, we should prepare ourselves for a period of outflows,” Maarten-Jan Bakkum, an emerging-market strategist at ING Investment Management in The Hague, said by e-mail. “This should push currencies down more, lead to higher interest rates in emerging markets and make it necessary for investors to adjust their EM growth expectations downwards.”
Brazil’s Ibovespa reversed an earlier decline as mining company MMX Mineracao & Metalicos SA led raw-material producers higher. The real dropped to a four-year low, prompting the central bank to intervene for a third day this week.
Turkey’s (XU100) Borsa Istanbul Stock Exchange National 100 Index dropped the most among major emerging-market gauges, sinking more than 20 percent from its May peak into a so-called bear market. Turkiye Halk Bankasi AS (HALKB) lost 7.4 percent in Istanbul. The lira dropped for a fourth day.
Russia’s Micex Index retreated 2 percent as OAO Sberbank, Russia’s biggest lender, fell 3.4 percent. The ruble dropped a third day against the central bank’s dollar-euro basket.
South Africa’s rand dropped to a four-year low and yields on 10.5 percent bonds due December 2026 jumped to 8.27 percent.
The Shanghai Composite Index lost 2.8 percent, the lowest in six months, while the Hang Seng China Enterprises Index (HSCEI) of mainland companies listed in Hong Kong slid 3.3 percent, the most since May 2012. The Jakarta Composite Index slumped 3.7 percent, the steepest loss in a year, while India’s S&P BSE Sensex tumbled 2.7 percent, the most since 2011. South Korea’s Kospi index declined 2 percent.
BYD Co. (1211), a Chinese auto company partially owned by Warren Buffett’s Berkshire Hathaway Inc., fell the most since Sept. 26, after saying a charger at a Hong Kong parking lot partially melted because of a faulty connection to the electricity grid.
The extra yield investors demand to own emerging-market debt over U.S. Treasuries soared 11 basis points to 331 basis points, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.
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