Emerging Stocks Seen Overbought as Jump Spurs Brazil Bull

Photographer: Dado Galdieri/Bloomberg

People shop for fruits and vegetable at an outdoor market in Rio de Janeiro. Brazil’s gross domestic product expanded 1.5 percent during the April to June period, or an annualized 6 percent, the national statistics agency said on Aug. 30. Close

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Photographer: Dado Galdieri/Bloomberg

People shop for fruits and vegetable at an outdoor market in Rio de Janeiro. Brazil’s gross domestic product expanded 1.5 percent during the April to June period, or an annualized 6 percent, the national statistics agency said on Aug. 30.

The biggest rally in developing-nation stocks in a year is showing signs of reversing to analysts following technical indicators.

The MSCI Emerging Markets Index rose 6.2 percent in the last six days, the most for the period since September 2012, as prospects for an imminent U.S. strike on Syria eased and economic data improved in China. The relative strength index for the gauge touched 70 -- the threshold that signals a security is poised to decline -- for the first time since Jan. 14. That level preceded an 18 percent slump in five months.

While developing-nation shares advanced 12 percent from their 2013 low in June and Brazil’s Ibovespa entered a bull market this week, stocks are still down 6 percent this year. The MSCI gauge is headed to its biggest annual underperformance since 1998 versus the developed-nation index, which is up 15 percent in 2013. Emerging-market stocks traded at 10.6 times estimated earnings on Sept. 10, the highest since May.

“Investors are pausing for a breather,” Joseph Dayan, the London-based head of markets at BCS Financial Group, the biggest trader of stocks in the Moscow Exchange, said by e-mail. “There is not much more than that at this point.”

The MSCI Emerging Market Index breached the upper boundary of its Bollinger band on Sept. 10, another technical indicator signaling it could be due for a reversal, data compiled by Bloomberg show. The developing-nations gauge fell less than 0.1 percent to 991.52 at 11:24 a.m. in New York.

‘Some Correction’

Declines provided an opportunity for “profit taking” for “short term players who bought in the last week or so,” Julian Mayo, who helps manage $2.5 billion in emerging-market assets as the co-chief investment officer at Charlemagne Capital Ltd. (CCAP) in London, said by e-mail. “After a 5 to 10 percent gain in some emerging markets in such a short time, some correction is always likely.”

The latest economic data from China to Brazil point to improved growth conditions in developing economies and should help bolster demand for emerging-market assets, according to Regis Chatellier, a strategist at Societe Generale SA in London.

China’s factory production rose 10.4 percent from a year earlier, while the country’s exports climbed more than estimated in August and inflation stayed below a government target, helping Premier Li Keqiang sustain a rebound in the second-largest economy from a two-quarter slowdown.

Brazil GDP

Brazil’s gross domestic product expanded 1.5 percent during the April to June period, or an annualized 6 percent, the national statistics agency said on Aug. 30. That was the most since the first quarter of 2010 and more than all 44 forecasts from analysts surveyed by Bloomberg, whose median estimate was 0.9 percent.

“Until recently, the U.S. was clearly leading the way on the growth front, with little signs that the backdrop in EM was improving,” Chatellier said in an e-mail yesterday. “This is still early days, but this has changed.”

Even as Chinese economic fundamentals improve, boosting the outlook for the country’s stock market, emerging-market volatility should remain high as the Federal Reserve scales back monetary stimulus, according to Saharat Chudsuwan, the Bangkok-based senior vice president at Tisco Asset Management Co., which has about $4.7 billion of assets. The MSCI Emerging Market Index’s 90-day volatility reached 17.5 yesterday, the highest level in about a year.

Fed Stimulus

“Emerging-market equities will still have high volatility in the next few months,” Chudsuwan said by phone on Sept. 11. “I am still overweight shares of developed markets such as the U.S. and Japan, where the economies show sustainable growth and monetary policies facilitate domestic consumption.”

The MSCI index has lost 5.4 percent since May 22, when the Fed signaled its asset-buying program could be trimmed if the U.S. economy showed a sustained recovery. Investors withdrew about $44 billion from emerging-market stock and bond funds since the end of May, Cambridge, Massachusetts-based EPFR Global, which tracks money flows, said Aug. 23.

In India alone, foreign funds pulled $3.7 billion from the stock market in the three months to August, the most since the global financial crisis in 2008. Standard & Poor’s reiterated last week it may cut India’s BBB- credit rating to junk because of the government’s failure to tackle its fiscal and current-account deficits.

More Stress

Fed policy makers will resume a debate on when to pare $85 billion in monthly bond purchases on their Sept. 17-18 meeting. The U.S. central bank is likely to reduce asset purchases to $75 billion this month, according to a Bloomberg survey of 34 economists.

Even after their tumble this year, emerging-market stocks still aren’t more attractive than equities in developed nations, according Marc Desmidt, the head of alpha strategies for Asia Pacific at BlackRock Inc., the world’s largest asset manager.

“It’s a reality that some of these markets have been oversold, probably pessimism does look a little bit high,” Desmidt said in a Sept. 11 interview on Bloomberg Television in Hong Kong. “It’s not surprising to see some bounces there. But more generally I think there is probably more stress for EM.”

To contact the reporters on this story: Julia Leite in New York at jleite3@bloomberg.net; Ash Kumar in London at akumar314@bloomberg.net; Maria Levitov in London at mlevitov@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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