Emerging Stocks Fall as China Stimulus Outlook Damps Risk Demand

The U.S.-Emerging Market Divergence
  • Chinese state news agency signals more prudent monetary policy
  • Lira rises for third day as Turkey reduces borrowing costs

Developing-nation stocks fell from a five-month high as signs that China may moderate stimulus measures reduced demand for riskier assets.

Chinese shares traded in Hong Kong dropped for a third time in four days as a commentary published by state news agency said prudence will feature in monetary policy more prominently than last year. The Ibovespa fell from a 10-month high after data showed Brazilian inflation accelerated more than forecast and unemployment increased. The rupee climbed the most in a month after India’s trade deficit narrowed to a five-year low. The South African rand advanced for a third day as inflation slowed. Turkey’s lira strengthened as the central bank cut borrowing costs.

Developing-nation stocks are heading for a second monthly gain and projected volatility in the market is around the lowest since July as the Federal Reserve’s dovish stance led a rebound from January lows. Some investors remain cautious as concerns about China’s growth and the outlook for commodity prices linger.

“The emerging-market equity rally was predicated partly on better China,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London who favors shares in India, Mexico and Poland. “So if China is going to stop stimulating as much, the assumption is that growth may be vulnerable again.”

China is signaling less of an inclination for expanding monetary stimulus following evidence of an acceleration in growth that has led some private economists to raise their forecasts. While the People’s Bank of China hasn’t issued an official statement of a change in policy stance, the first signal of a shift came Monday in the Xinhua commentary.

The MSCI Emerging Markets Index dropped 0.4 percent to 849.45 as eight of its 10 industry groups retreated. The gauge trades at 12 times the projected earnings of its members, about 26 percent cheaper than the valuation for developed-nation stocks.

The Hang Seng China Enterprises Index slid 1.2 percent, tracking losses in mainland shares. Demand for Chinese stocks has been fading this month amid concern that improving economic data will prevent the government from adding stimulus.

Brazil, Russia

The Ibovespa fell 0.1 percent in Sao Paulo. The worse-than-forecast inflation and unemployment data released Wednesday underscored the economic challenges Brazil faces, offsetting the momentum that has been building on speculation President Dilma Rousseff will be impeached and a new administration will help restore confidence in the country.

Russia’s Micex Index rose 1.6 percent. The gauge is heading for a fourth month of increases amid optimism the worst is over for the economy as oil rebounds. Brent crude rose 4 percent to $45.80 a barrel on Wednesday.

The MSCI Emerging Markets Currency Index rose 0.1 percent to the highest level since July 29. The gauge’s gains are being fueled by the outlook for slower path of rate increases in the U.S., a rebound in commodities and optimism China’s economy is stabilizing.

The rupee strengthened 0.5 percent against the dollar as official data late on Monday showed the trade shortfall eased to $5.07 billion in March, thanks to a 21.6 percent year-on-year plunge in inbound shipments. 

Turkey’s lira gained 0.6 percent, the most among emerging-market currencies. The central bank cut its overnight lending rate by 50 basis points in the first monetary policy committee meeting chaired by Governor Murat Cetinkaya.

The premium investors demand to own emerging-market debt over U.S. Treasuries fell seven basis points to 380, according to JPMorgan Chase & Co. indexes.

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