Emerging-Market Stocks Extend Declines as China Concern Persists

  • Hong Kong-listed China shares fall as mainland stocks gain
  • Equities extend their worst start to a year since 1998

Emerging-market stocks extended their worst start to a year since 1998 and most currencies weakened as ebbing confidence in China’s economy pushed more investors to convert their holdings into cash.

Hong Kong-traded Chinese shares fell for a third time in four days as central bank cash injections and a stable yuan fixing failed to restore optimism over the world’s second-largest economy. Equity gauges in Saudi Arabia, Dubai and Egypt dropped at least 3.5 percent. Brazilian stocks rebounded from the lowest level since March 2009 as Petroleo Brasileiro SA advanced with oil prices. South Korea’s won slumped to a five-year low after the central bank cut growth forecasts.

“The problems remain: doubts about China’s handling of capital outflows and management of the currency, continuous pressure on the oil price and, of course, the poor emerging-market growth momentum that still has not stabilized,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague with about $206 billion under management. “The underperformance versus developed markets is likely to continue as the perception of currency risk deteriorates further.”

Stocks

The MSCI Emerging Markets Index has declined 8.9 percent since the start of the year. Policy makers in Beijing are struggling to prevent a vicious cycle of capital outflows and a weakening currency as concern mounts that Asia’s largest economy is headed for a hard landing. The selloff in Chinese stocks, which has driven the Shanghai Composite Index down 15 percent in 2016, is a setback for officials who went to unprecedented lengths to prop up the nation’s $5.6 trillion market after last summer’s crash.

The MSCI equities gauge dropped 0.9 percent to 723.15 on Thursday, the lowest closing level since July 2009. Stocks on the gauge sell for an average 10.4 time projected earnings, a 29 percent discount to the MSCI World Index.

The Hang Seng China Enterprises Index slipped 0.4 percent after earlier falling to the lowest level since 2011. The Shanghai Composite Index rebounded after briefly entering bear-market territory.

‘Self-Fulfilling Prophecy’

“As more gloomy forecasts come out for 2016, more investors are turning their equity holdings into cash, thus fueling a self-fulfilling prophecy,” said Attila Vajda, managing director at Singapore-based advisory firm Project Asia Research & Consulting Pte. “China concerns have been here for a while now, but investors are now acting on their concerns in a more decisive way when positioning their 2016 portfolios.”

The Jakarta Composite Index fell 0.5 percent as Islamic State militants staged an assault, killing at least two people, in the worst attack in the capital since at least 2009.

The Ibovespa advanced 1.4 percent in Sao Paulo. Petrobras gained 8 percent, contributing the most to the Brazilian benchmark’s advance. The real strengthened 0.4 percent against the dollar.

An index of 20 emerging-market currencies was little changed, trading within 0.4 percent of the lowest level on record. The won depreciated 0.8 percent against the dollar after the Bank of Korea cut growth forecasts for this year as it held its benchmark interest rate at a record low.

Bonds

The offshore yuan weakened 0.5 percent on speculation a narrowing gap with the Shanghai rate will dissuade the People’s Bank of China from stepping into the market. The onshore yuan fell 0.2 percent in its biggest drop in a week. The Hong Kong dollar weakened as much as 0.3 percent, its biggest intraday loss since 2003. Speculation mounted in the options market that the city’s 32-year-old currency peg will break as investors lose confidence in Chinese assets.

The drop in stocks has supported sovereign bonds, with yields sliding to record lows in China, South Korea and Taiwan. The People’s Bank of China conducted 160 billion yuan ($24 billion) of seven-day reverse-repurchase agreements in its open-market operations on Thursday, up from 70 billion yuan a week ago.

Indonesian government notes rose for a fifth day, pushing the 10-year yield to the lowest in more than a month. Bank Indonesia cut its main interest rate by 25 basis points to 7.25 percent and also cut the rate it pays lenders on overnight deposits, known as the Fasbi, by 25 basis points to 5.25 percent.

The premium investors demand to own emerging-market assets over U.S. Treasuries was unchanged at 455 basis points, according to JPMorgan Chase & Co. indexes.

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