- All industry groups in MSCI gauge retreat before Eid holiday
- Mexican peso and South African rand lead losses in currencies
Emerging-market stocks ended a five-day rally amid speculation a rebound following the U.K.’s vote to leave the European Union had gone too far. Russia’s ruble and the Mexican peso declined with oil.
The MSCI Emerging Market Index dropped the most in a week, with all 10 industry groups in the gauge declining. The peso and the South African rand weakened more than 1.1 percent versus the dollar, while the ruble slid for a second day as Brent crude slipped below $50 a barrel. The cost to protect Polish debt against default climbed the most in three years after the government announced a pension overhaul.
Developing-nation stocks added more than $500 billion after Britain’s decision to exit the EU led central banks to add to monetary stimulus to support economic growth and bets evaporated on the probability of an interest-rate increase by the Federal Reserve this year. Still, a potential slowdown in EU economies would expose countries across central Europe and Turkey to falling investment, while Russia and some Middle East nations may be hurt by lower demand for commodities, HSBC Holdings Plc said today.
“Investors are locking in some profits after the sharp rally last week post-Brexit,” said Michael Wang, a strategist at hedge fund Amiya Capital LLP in London, who favors Mexican and South Korean stocks. “The gains may have gone a bit too far too quickly. I do still think, however, that emerging-market assets can outperform, given they are not the source of uncertainty at the moment.”
The MSCI Emerging Markets Index fell 1.4 percent to 831.68 on Tuesday. It had climbed 6.2 percent in the past five days, the most since the period ended March 7. The developing-nation benchmark trades at 11.9 times projected 12-month earnings, compared with a multiple of 15.6 times for the MSCI World Index. Exchange-traded funds that buy developing stocks and bonds added $380 million last week in a fifth week of inflows, data compiled by Bloomberg show.
Central European countries including the Czech Republic and Hungary, as well as Turkey are “most exposed” to the weaker outlook for the U.K. and Europe after the U.K. referendum, HSBC economists including Simon Williams wrote in a report on Europe, Middle East and Africa. The U.A.E. may also suffer, as the European Union and the U.K. are “key sources” of services demand and foreign direct investment into the country, the note said.
Sberbank PJSC and Gazprom PJSC were among the biggest losers on Russia’s Micex Index, which slid 0.6 percent as Brent crude dropped 4.3 percent to $47.96 a barrel. Shares in South Africa lost 1.5 percent.
China’s Shanghai Composite Index rose 0.6 percent, advancing for a third day, to close above 3,000 for the first time in more than two months amid speculation the central bank will take steps to boost the economy.
Markets in Indonesia are closed all week for the Eid al-Fitr holiday, Malaysia is shut Wednesday and Thursday, India on Wednesday and Dubai through Friday.
The MSCI Emerging Markets Currency Index retreated 0.6 percent. It was little changed on Monday after jumping 2 percent in the four days through Friday. The rand declined 1.2 percent, its biggest loss in a week, while the Mexican peso and Brazilian real fell for a third day.
The ruble lost the most since June 24 amid forecasts a 76 percent rebound in oil prices since January is nearly over, limiting the upside for Russia’s currency. Vitol Group of Cos., the world’s largest independent oil-trading house, predicted prices will end the year close to current levels.
The Polish zloty lost 0.8 percent, sliding for a third day. The country’s proposed overhaul of the pension system, assuming the state taking over some assets held by privately-managed pension funds, is negative for the zloty, according to analysts at UniCredit Bank AG. The news also pushed up five-year credit default swaps to the highest since February.
Aviva Investors’ Aaron Grehan, who helps oversee $4.5 billion in emerging-market debt, favors Indonesia and sees opportunities in Latin American hard-currency, local sovereign and corporate debt after the Brexit vote, he said on Bloomberg Radio. The outlook for emerging-market asset prices is “attractive,” given the supportive policies from central banks, he said.
South African local bonds due in December 2026 fell, pushing the yield up 14 basis points to 8.83 percent. The yield on similar-maturity Russian notes climbed 12 basis points to 8.39 percent.