Emerging Stocks Rout Burns Investors Piling in at Highs

Aug. 1 (Bloomberg) -- Josh Rosner, managing director at Graham Fisher and Company, and Michael Spence, professor at NYU Stern School of Business, discuss what a default by Argentina’s government means to the global economy, especially in the context of recent geopolitical risks. He speaks on “Bloomberg Surveillance.”

The biggest selloff in emerging-market stocks since March is handing losses to investors who piled in as the benchmark index rose to an 18-month high.

Developing-nation equity funds recorded $5.3 billion of net inflows in the week to July 30, the most since January 2013, according to EPFR Global data compiled by Barclays Plc. Exchange-traded funds and mutual funds that invest in Asia lured $2.3 billion, the most since 2007, Citigroup Inc. said in a report citing EPFR.

The MSCI Emerging Markets Index sank 1.2 percent yesterday and extended its retreat today as lower-than-estimated earnings at Samsung Electronics Co. (005930), unrest between Russia and Ukraine and a default by Argentina spurred speculation that the rally has gone too far. The gauge had climbed as much as 7.8 percent this year as China’s economy accelerated and concern eased that Federal Reserve stimulus cut will spur capital outflows.

“Previously, better global growth called for a higher-risk approach,” Daphne Roth, the Singapore-based head of Asian equity research at ABN Amro Private Banking, which oversees about $207 billion, said by phone. “With what has happened, we are more wary.”

The past week’s fund purchases helped turn flows into all U.S.-listed emerging-market funds positive for the year on July 24, reversing investor flight that had drained as much as $13.9 billion in the first 2 1/2 months of the year. The two largest U.S. ETFs invested in emerging markets received $2.04 billion, the biggest purchases in about four months. China-focused ETFs attracted the most money among 24 countries tracked by Bloomberg.

Valuations Rise

The MSCI emerging-markets index slipped 1 percent to 1,055.61 at 10:56 a.m. in London, heading for the lowest close since July 1. The MSCI Asia Pacific Index (MXAP) dropped 1.1 percent, paring this year’s gain to 4.2 percent.

The developing-nation gauge is valued at 11 times estimated earnings for the next 12 months, versus a three-year average of 10 times, according to data compiled by Bloomberg. Its 14-day relative strength index had climbed this month above the 70 threshold that some traders use as a signal a rally is overdone.

“This is a correction,” Hans Goetti, a Singapore-based money manager at Banque Internationale a Luxembourg SA, which oversees about $40 billion, said by phone from Singapore. “It is still an uptrend.”

Samsung, Sberbank

Technology shares tumbled yesterday as Samsung Electronics, the world’s biggest smartphone maker, posted a drop in net income, while OAO Sberbank fell in New York as the European Union banned the state-controlled lender from selling bonds or shares in the 28-nation bloc. Standard & Poor’s said Argentina was in default after it missed a $13 billion interest payment on debt and negotiations failed.

The retreat in stocks extended today even after China’s manufacturing expanded in July at the fastest pace in more than two years, signaling a pickup in the economy as the government boosts credit growth and accelerates spending.

Investors will get more clues on the outlook for the world’s largest economy from the U.S. Labor Department’s monthly employment report today, which analysts predict will show companies added 230,000 jobs in July.

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net; Sarah McDonald at smcdonald23@bloomberg.net Stephen Kirkland

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.