Emerging-Market Stocks Reverse 2016 Decline as Commodities Rally

Finding Opportunities in Smaller Latin American Markets
  • Energy companies lead gains as Brent crude climbs past $40
  • Average stock valuations rise to highest since late July

Emerging-market equities erased their decline for 2016 as commodity prices rallied and U.S. jobs data suggested the Federal Reserve will raise U.S. interest rates slowly. The yuan ended a four-day advance after Chinese leaders refrained from announcing specific support measures.

Energy and raw-material stocks were the biggest gainers on the MSCI Emerging Markets Index as Thai Oil PCL rallied 5 percent after earnings beat estimates, while Qatar’s benchmark followed gauges in Dubai and Abu Dhabi into a bull market. Oil producers Gazprom PAO and Lukoil PJSC each rose more than 2.3 percent in Moscow. Iron-ore producer Vale SA led gains in Sao Paulo as prices for the steel-making ingredient surged. The yuan fell 0.1 percent to 6.5168 per dollar.

Average emerging-market price-to-earnings ratio is back to July levels
Average emerging-market price-to-earnings ratio is back to July levels

Oil’s recovery to a three-month high and data on Friday that showed the U.S. created more jobs last month than expected, even as wages fell, is improving the outlook for the global economy and making investors more comfortable taking risks. Emerging-market currencies will benefit as the Fed will probably push back the pace of rate increases, Julius Baer said in a research note on Monday, as it raised developing-nation stocks to neutral.

“There is insufficient strength in U.S. data to suggest that the Fed needs to
raise again in a hurry,” said Tony Hann, who helps oversee about $270 million
as head of equities at Blackfriars Asset Management in London, and is
overweight ASEAN and Indian shares. This “coupled with firmer oil prices” is supporting emerging markets.

Fund Flows

The MSCI developing-nation stock benchmark rose 0.5 percent to 795.18. The index has gained 0.1 percent in 2016. Investors added $2.31 billion to U.S. exchange-traded funds that invest in emerging markets last week, the biggest inflow since April 2014. In addition to Julius Baer, JPMorgan Chase & Co. said on Monday it would consider boosting positions in emerging markets if the Fed reverses its tightening stance.

A gauge tracking emerging-market energy companies advanced 1.8 percent, as seven of 10 industry groups rose. Brent crude sold for more than $40 a barrel for the first time since December as major producers prepared to discuss freezing output amid a global glut.

Stock Valuations

Brazil’s Ibovespa added 0.3 percent. Vale rallied 9 percent to the highest since November as prices for the steel-making ingredient soared the most ever after Chinese policy makers signaled their willingness to buttress economic growth.

The Bloomberg Commodities Index rose 1.2 percent to the highest since Dec. 7.

The MSCI Emerging Markets index is trading at an average of 11.6 times projected 12-month earnings of its members, up from a multiple as low as 10 in January. That’s the highest valuation since July and compares with 15.6 for the MSCI World Index of advanced-nation shares.

The QE All Share Index advanced 2.1 percent in Doha, taking the measure’s gain since a Jan. 18 low to 23 percent. Abu Dhabi’s ADX General Index entered a bull market on Sunday and Dubai’s DFM General Index reached the milestone last month. Hedge funds unwound bearish bets on oil at the fastest pace in 10 months, U.S. Commodity Futures Trading Commission data showed, as the prospect of prices sinking to $20 receded.

Currencies Strengthen

Thai Oil rose as its stock was upgraded by RHB Research. China’s Shanghai Composite Index added 0.8 percent, and the Hang Seng China Enterprises Index of mainland equities in Hong Kong advanced by the same amount even after the National People’s Congress set a weaker growth target.

A gauge tracking 20 emerging-market currencies extended a five-day rally, advancing 0.1 percent. Colombia’s peso added 1.3 percent against the dollar, while the Russian ruble gained 0.7 percent. Indonesia’s rupiah capped its longest stretch of gains since 2010.

Overseas investors raised holdings of Malaysian government bonds to a record 176.7 billion ringgit ($43 billion) in February, central bank data show. The 10-year note yield has fallen to 3.9 percent from a high of 4.45 percent in August. Equivalent Indonesian securities pay 7.86 percent.

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