Emerging Stocks Advance as Stimulus Bets Spur China Equity Rally

What Are the Key Emerging Markets Risks?
  • Equity valuations increase to highest level this year
  • Rupiah rallies for 10th day in longest streak since 2010

Emerging-market equities advanced for a fourth day, rallying to the highest level in two months, as speculation that China will increase stimulus and better-than-forecast U.S. economic data outweighed concern that global growth is slowing.

Financial stocks led gains on the MSCI Emerging Markets Index as China Construction Bank Corp. rallied 3.3 percent in Hong Kong. The Shanghai Composite Index jumped the most since November. The Ibovespa rose to the highest since mid-December in Sao Paulo. A gauge of developing-nation bonds climbed to a three-month high, and currencies in South Korea and Brazil strengthened. Indonesia’s rupiah extended its longest stretch of gains since 2010.

Assets in developing countries have been rebounding as commodity prices stabilized amid speculation that China’s National People’s Congress, where delegates will sign off on a new five-year economic plan, will announce new measures to support the economy during a meeting that starts March 5. Sentiment was also supported after data on Tuesday showed American factory activity in February shrank less than forecast.

“It’s not all doom and gloom” said Hertta Alava, the head of emerging markets at FIM Asset Management Ltd. in Helsinki, who favors equities in Russia and the U.A.E. The gains are being underpinned by “very good” U.S. macro numbers announced on Tuesday, India’s new budget, and speculation that China will announce additional stimulus, she said.

Stocks

The MSCI Emerging Markets Index rose 2.2 percent to 769.10. A four-day gain of 4.6 percent pushed the average valuation of its members to the highest level this year.

The measure of Chinese shares listed in Hong Kong climbed 3.8 percent and the Shanghai Composite Index rallied 4.3 percent as raw material and real-estate companies surged on signs of loosening property restrictions. Pressure is building on the government to follow up on Monday’s cut in lenders’ reserve-requirement ratios with more stimulus after data this week showed a deterioration in manufacturing.

The S&P BSE Sensex Index added 2 percent, capping the biggest two-day gain since May 2014. The gauge has rebounded from its biggest monthly loss since November 2011, as optimism about India’s budget increased and speculation mounted that the central bank would lower interest rates after Prime Minister Narendra Modi stuck with the budget deficit targets.

Turkish shares climbed 1.1 percent. The Micex Index ended a four-day advance in Moscow. Brent crude climbed 12 cents to $36.93 a barrel after slumping to as low as $36.10. The Ibovespa rose 1.8 percent to the highest level since Dec. 17, led by Vale SA, which surged 11 percent after the firm reached an agreement to pay at least $1.1 billion for its iron-ore venture with BHP Billiton Ltd. over the next three years for damage caused by a dam spill.

Currencies

A gauge tracking 20 developing-nation currencies rose 0.3 percent, extending gains for a fourth day. Indonesia’s rupiah appreciated 0.5 percent in its 10th straight advance on speculation the central bank won’t cut interest rates too aggressively.

The recovery in currencies has room to run as bearish bets are unwound, Citigroup Inc. said in a research note, while Morgan Stanley said the exchange rates were “significantly cheap to fair value” and that high-yielding Indian and Indonesian domestic bonds were attractive.

Brazil’s real and the Argentine peso led developing-nation currencies higher, each gaining at least 0.9 percent. The Turkish lira strengthened 0.4 percent. Deutsche Bank said the currency was undervalued and saw potential for a “positive surprise” for February inflation. The South African rand declined 0.2 percent.

Bonds

A JPMorgan Chase & Co. emerging-market bond index climbed to 721.39, the highest close since Nov. 4. The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed three basis points to 437, the lowest since January.

Turkey said it would return to the Eurobond market, selling dollar-denominated bonds for the first time since April as borrowing costs fall to the lowest level this year and investors speculate the U.S. won’t raise interest rates anytime soon.

Brazil’s Treasury is considering the possibility of selling bonds as foreign yields drop, according to Marcia Tapajos, the head of external debt operations. The nation hasn’t sold debt overseas since September 2014 and the Treasury would consider issuing a new benchmark bond, Tapajos said.

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