Emerging ETF Declines as Fed Cuts Stimulus Amid Selloff

The iShares MSCI Emerging Markets Index exchange-traded fund declined to a five-month low after the Federal Reserve pressed on with a reduction in economic stimulus amid a selloff in developing-nation currencies.

The ETF retreated 1.4 percent to $37.78 at 4 p.m. in New York. The MSCI Emerging Markets Index advanced 0.3 percent to 936.67. South Africa’s rand drove a rout in currencies after the nation’s central bank unexpectedly increased its benchmark interest rate, while Russia’s ruble dropped to a record low against Bank Rossii’s target dollar-euro basket. The Borsa Istanbul 100 Index tumbled 2.3 percent after Turkey’s doubling of interest rates failed to bolster investors’ confidence.

The Fed will trim its monthly bond buying by $10 billion to $65 billion, sticking to its plan for a gradual withdrawal of stimulus from departing Chairman Ben S. Bernanke’s unprecedented easing policy. The South Africa Reserve Bank joined other emerging-market central banks from Turkey to Brazil and India that tightened policy to bolster their currencies.

“It’s an issue of confidence,” Sean Lynch, the Omaha, Nebraska-based global investment strategist at Wells Fargo Private Bank, which oversees about $170 billion in assets, said by phone. “These short term interest-rate rises we’ve seen in Turkey, South Africa, will they do the trick and stem the outflow of money from the countries? The jury is still out on that. Tapering will continue to weigh on emerging markets.”

Brazil’s Ibovespa (IBOV) fell for the fourth time in five days as Itau Unibanco Holding SA slumped after announcing the acquisition of Corpbanca SA in Chile. The real retreated to the weakest level since August.

Russia, Turkey

Russian shares posted their longest losing streak since April as the ruble’s slide to a record low prompted investors to sell the cheapest emerging-market equities. OAO Sberbank, the nation’s biggest lender, slid to the lowest since Sept. 13. The ruble weakened 1.2 percent as of 6:01 p.m. in Moscow.

The Borsa Istanbul 100 Index (XU100) of shares slumped to the lowest since July 2012 as Turkiye Garanti Bankasi AS drove losses in lenders. The lira swung between gains and losses as traders assessed whether the central bank’s move would be enough to stem capital outflows.

South Africa’s rand sank to a five-year low versus the dollar. The nation’s central bank raised its policy rate for the first time since 2008, citing inflation pressures caused by the currency’s decline.

Economic Flexibility

“What the central banks are doing right now will not solve the problem,” Wayne Lin, a portfolio manager at Baltimore-based Legg Mason Inc., which oversees $680 billion, said by phone. “They’re helping their currencies in the short term, but hurting the economy in the long term. Such measures only work when you have the flexibility in your economy, and a lot of emerging markets don’t.”

Mark Mobius, chairman of Templeton Emerging Markets Group, said inflows into emerging markets will resume later this year following a rout triggered by the Fed’s stimulus tapering.

“People are enjoying what they see as a bull market in the U.S.,” he said in an interview in Johannesburg today. “As we go forward, we’re going to see a lot of overweight positions in the U.S. So, given the fact that emerging markets are still growing fast, given that they have low debt-to-GDP ratios, given that they have high foreign-exchange reserves, we believe that money will be flowing back in again to emerging markets.”

China’s stocks rose as banks advanced amid near record-low valuations. China Minsheng Banking Corp. (600016) and Huaxia Bank Co. gained at least 1.1 percent. Seven companies including Porton Fine Chemicals Ltd. and Netposa Technologies Ltd. (300367) were all suspended from trading after jumping by the 44 percent daily limit on their Shenzhen Stock Exchange debuts.

India’s Stocks

India’s S&P BSE Sensex (SENSEX) dropped as Sesa Sterlite Ltd. retreated to a two-week low, leading metal producers lower. State Bank of India slid 1.5 percent, sending a gauge of lenders to a three-month low. Maruti Suzuki India Ltd. (MSIL) rallied after Macquarie Group Ltd. raised its recommendation.

South Korea’s won climbed the most in six months after reports showed the annual current-account surplus widened to a record and factory output beat estimates.

The premium investors demand to own emerging-market debt over U.S. Treasuries rose eight basis points, or 0.08 percentage point, to 348 basis points, according to JPMorgan Chase & Co.

To contact the reporters on this story: Julia Leite in New York at jleite3@bloomberg.net; Elena Popina in New York at epopina@bloomberg.net

To contact the editor responsible for this story: Tal Barak Harif at tbarak@bloomberg.net

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