Photographer: Dimas Ardian/Bloomberg

Emerging-Market Sentiment Turns More Bearish With Oil Price Drop

  • Equities and currencies head for worst years since 2011, 1997
  • Russia's ruble caps third straight annual depreciation

Sentiment toward emerging-market assets turned more bearish as oil slumped below $37 a barrel and concern lingered that the slowdown in China will affect global growth.

Measures of developing-nation stocks and currencies fell for a third day, and are set for the biggest annual losses since 2011 and 1997, respectively. Chinese shares traded in Hong Kong led declines in Asia. Russia’s ruble capped its third annual slump, closing at a record low against the dollar.

Emerging-market stocks have fallen with oil prices this year
Emerging-market stocks have fallen with oil prices this year

“Weak oil is seen as symptomatic of weak global growth and there is an increasing realization that next year is going to be tough,” said Tony Hann, the head of equities at Blackfriars Asset Management Ltd. in London, who avoids energy stocks in favor of consumer-oriented assets. “A number of markets are closed tomorrow, so there is little appetite for traders to buy today.”

There will be no trading in markets including Russia, the Czech Republic, Hungary and South Korea on Thursday.

Stocks

The MSCI Emerging Markets Index decreased 1 percent to 791.47, set for an annual decline of 17 percent. Companies on the gauge trade at an average valuation of 10.9 times 12-month estimated earnings, a 31 percent discount to the MSCI World Index, which fell 1.9 percent this year.

All 10 industry groups in the emerging stocks index fell Wednesday. Energy companies declined 1.4 percent as Brent crude dropped 3.5 percent to $36.46 a barrel. The dollar-denominated RTS Index of Russian stocks slid 1.6 percent. The Ibovespa equity benchmark retreated 0.7 percent in Sao Paulo.

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong slid 1.3 percent on Wednesday and is down by the same amount this month. Investors will be closely watching Chinese manufacturing and services data on Friday for any signs the economy gathered strength in December.

Currencies

A gauge tracking 20 developing-nation currencies retreated 0.6 percent, heading for a 15 percent decline this year as currencies in Russia, Turkey, Colombia, South Africa, Brazil and Argentina each slumped 20 percent or more.

Russia’s ruble weakened 1.9 percent to close at a record-low 73.59 per dollar on its last trading day of 2015. The currency has erased almost 60 percent of its value in the past three years. Data on Wednesday showed a gauge of Russian manufacturing slid back into territory that signals a decline in economic activity, casting doubt on how quickly the energy exporter will be able to pull itself out of its first recession since 2009.

All 24 emerging-market currencies in a basket tracked by Bloomberg have dropped this year except the Hong Kong dollar. Seventeen of them are forecast to decline in the fourth quarter as rising U.S. interest rates spur capital outflows. South Africa’s rand and the Brazilian real each retreated at least 1.8 percent on Wednesday.

“Markets can quite clearly see that there doesn’t seem to be a durable positive impulse from the wider commodity markets, in particular oil,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “With the slightly firmer U.S. confidence data, it’s a gentle reminder that the Fed may not be done hiking."

The offshore yuan depreciated to a five-year low of 6.6105 a dollar, before rebounding to 6.5667 per dollar on speculation the government was intervening to support the currency. China’s central bank cut the onshore daily reference rate to the weakest since 2011.

China has suspended at least two foreign banks from conducting some cross-border yuan business until late March, limiting their scope to profit from a widening gap between the currency’s exchange rates at home and abroad, according to people with direct knowledge of the matter.

Bonds

China’s 10-year bonds dropped the most in two weeks on Wednesday, with the yield rising to 2.84 percent. It reached 2.8 percent on Dec. 28, the lowest for a benchmark of that maturity since 2009. A Bloomberg gauge of emerging-market local sovereign debt has lost 1.9 percent in dollar terms this year, compared with a 0.7 percent gain for U.S. Treasuries.

Russian bonds gained for a sixth day, pushing the five-year yield down two basis points to 9.94 percent. The premium investors demand to own emerging-market debt over U.S. Treasuries was unchanged at 408 basis points, according to JPMorgan Chase & Co. indexes.

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