Emerging Markets Extend Losses as Brexit Fallout Outweighs Fed

How Brexit Will Impact Free Trade Deals, Emerging Markets
  • Freeze on U.K. real estate funds spurs risk-off sentiment
  • Fed minutes show officials are uncertain about U.S. economy

Emerging-market stocks fell for a second day and currencies had the longest streak of losses in three weeks as concern the Brexit contagion is spreading outweighs the Federal Reserve’s cautious stance on raising interest rates.

The MSCI Emerging Markets Index dropped 1.5 percent to 819.19 on Wednesday, paring its gains this year to 3.2 percent. A gauge of currencies slid for a third day after Bank of England Governor Mark Carney said Tuesday the risks from Britain’s decision to leave the European Union have started to crystallize.

Concern that the U.K.’s decision to leave the European Union could hamper global growth pushed investors into safe havens, outweighing the impact on riskier assets from the Federal Reserve’s cautious stance on raising interest rates. Minutes from the June 14-15 Fed meeting released on Wednesday showed several officials lowered their expectations for the number of times they’ll increase borrowing costs this year amid uncertainty about the strength of the U.S. economy.

“I don’t think markets will parse the minutes so closely as long as Brexit and growth remain concerns for markets,” said Paul Christopher, head global market strategist for Well Fargo Investment Institute. “The fundamentals are too negative for emerging markets.”

Three asset managers froze withdrawals from real estate funds as expectations that U.K. property values could plunge 20 percent in the next three years led to a rush for redemptions. Their action evoked memories of the 2008 financial crisis, pushing investors to park funds in safer assets such as gold, and ending a post-Brexit rally in emerging markets fueled by bets the Fed will further delay interest-rate increases.

“The aftershocks of the Brexit vote are being felt,” said Julian Mayo, who helps oversee $2 billion as co-chief investment officer at Charlemagne Capital Ltd. in London. “The suspension of redemptions in the three property funds has led to the perception that risk is being taken off the table.”

Stocks

Equities in the developing world are beating advanced-nation peers by the most in seven years. That outperformance will continue as the outlook for growth picks up while political risks from the U.S. to the U.K. escalate, according to Mayo. He favors Indian and Brazilian stocks on grounds they may benefit from a revival in the consumer economy.

The Hong Kong Stock Exchange Hang Seng China Enterprises Index slid 1.6 percent, for a two-day loss of 3.4 percent.

Poland’s benchmark index closed at the lowest level since January as the new central bank governor left borrowing costs unchanged, preferring to maintain the status quo amid risks related to Brexit. In South Africa, the FTSE/JSE Africa All Shares Index dropped 1.7 percent.

The MSCI gauge trades at 11.7 times the projected earnings of its constituents, a 25 percent discount to the valuation of advanced-nation shares. All 10 industry groups on the measure retreated on Wednesday, with the biggest losses seen in tech companies.

Currencies, Debt

The MSCI Emerging Markets Currency Index declined 0.4 percent as its 30-day volatility climbed to the highest level since April. South Korea’s won led losses and South Africa’s rand, the world’s most volatile currency, weakened for a third day.

The premium investors demand to own emerging-market debt rather than U.S. Treasuries widened for a second day, increasing one basis point to 386, according to JPMorgan Chase & Co. indexes.

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