Emerging Markets Extend Losses as China Growth Concern Returns

Will China Achieve Its Growth Targets?
  • Chinese shares traded in Hong Kong lead declines after holiday
  • Turkey's lira weakens as slower inflation boosts rate-cut bets

Emerging-market stocks dropped the most in almost three months, lead by losses in Chinese shares in Hong Kong, as trading resumed after a holiday and manufacturing in the second-biggest economy showed signs of weakening, weighing on growth prospects in developing nations.

The Hang Seng China Enterprises Index of mainland equities retreated the most in more than two months after a private factory-output gauge slipped in April, missing economists’ estimates. Turkish stocks lost the most since November on signs of increasing political turmoil. Egyptian equities plunged 3.1 percent, almost erasing last month’s advance. The rand and Colombian peso weakened at least 2.5 percent versus the dollar.

The contraction in the purchasing managers’ index from Caixin Media and Markit Economics for Chinese manufacturing follows the Sunday release of the government’s broader measure, which showed conditions stabilized last month. The mixed readings highlight the challenge for policy makers balancing the need for stimulus to support the economy, while also seeking to avoid propping up zombie companies in industries with excess capacity.

“A disappointing Chinese number should always raise doubts about a possible emerging-market growth recovery,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors shares in India and the Philippines. “The bigger picture remains one of sluggish EM growth and a high sensitivity to Fed policy.”

The MSCI Emerging Markets Index declined 1.7 percent to 821.09 in a third day of losses. The measure trades at 11.5 times the estimated 12-month earnings of its members, a 28 percent discount to the valuation for the MSCI World Index of advanced-nation shares.

Trailing price-to-earnings multiples for emerging markets is at a 25 percent discount to developed nations, Geraldine Sundstrom, a portfolio manager at Pimco, said in a blogpost on the firm’s website.

“Now we think the time has come to actively engage,” Geraldine, who likes the Russian ruble and the Mexican peso, said. “We are beginning to redeploy capital to EM where we can find good value.”

Manufacturing Data

A private gauge of Chinese manufacturing fell to 49.4, according to data released Monday, missing economists’ estimates for 49.8 and down from 49.7 in March. Readings below 50 signal deteriorating conditions. While Chinese data have yet to suggest a solid economic recovery, and U.S. manufacturing figures on Monday also showed slowing growth. Interest-rate futures are pricing in just 10 percent odds that the Federal Reserve will raise borrowing costs by its next meeting in June, less than half the chance seen a month ago.

Anglo American Plc declined 11 percent in Johannesburg, pushing South Africa’s benchmark gauge to its biggest decrease in almost three months. The Dubai Financial Market General Index fell for a fifth day, its longest losing streak since March, led by a 4.4 percent loss by Dubai Investments PJSC.

The Borsa Istanbul 100 Index lost 3.3 percent after a parliamentary committee agreed late on Monday to remove the legal immunity of lawmakers accused of supporting the separatist Kurdish PKK, designated a terrorist group by Turkey, the U.S. and European Union.

In Saudi Arabia, the stock exchange said it will cut the amount of assets foreigners must have under management to invest directly in the nation’s stocks, as it plans changes designed to attract more cash from overseas. The benchmark index fell 1.2 percent as Brent crude dropped 2.2 percent.

Currencies

The MSCI Emerging Markets Currency Index lost 0.5 percent, weakening for a second day. The rand retreated to 14.64 per dollar and Colombian peso lost the most since March. The Mexican peso fell 2.2 percent to 17.59 against the dollar.

Turkey’s lira weakened for a second day as political turmoil led investors to look past a bigger-than-expected decline in the country’s inflation rate to 6.57 percent last month, the lowest in almost three years.

Yields on Turkey’s 10-year bonds climbed 21 basis points to 9.46 percent. The selloff worsened after the ruling AK Party board stripped Prime Minister Ahmet Davutoglu of his powers to appoint leaders to the party’s local organizations on Friday, reducing his authority and empowering loyalists of President Recip Tayyip Erdogan. Goldman Sachs Group Inc. said the decision was “one of the clearest signs yet of tensions” between Davutoglu and Erdogan, who wants an executive presidency.

The premium investors demand to own emerging-market sovereign debt rather than U.S. Treasuries widened nine basis points to 395 basis points, according to JPMorgan Chase & Co. indexes.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE