Emerging-Market Rally Gains Momentum From Improving China Data

Emerging Markets Rally: How Long Can It Last?
  • Indian bonds advance as Rajan reiterates accommodative policy
  • Kospi gauge closes at nine-month high after S&P raises rating

Emerging-market stocks and currencies advanced for a fourth day as narrowing Chinese factory deflation signaled the world’s second-largest economy is stabilizing. Indian bonds rallied after the central bank said it’s keeping up its accommodative policy.

Raw-material producers touched a 13-month high, paced by South Korean steelmaker Posco, while stocks in the Philippines rose for a second day. Data out of China, the biggest trading partner for both nations, showed the producer-price index registered its slowest decline in two years. Turkish stocks rallied as President Recep Tayyip Erdogan visited Russia to rebuild relations with President Vladimir Putin. Yields on Indian bonds fell after the central bank said it will conduct more open-market purchases of debt.

Since China is a major export market for developing nations from Brazil to South Africa, signs of an improvement in the nation’s manufacturing industry bolsters the case for investing in riskier assets. Investors seeking to escape near-zero rates in much of the developed world have funneled about $14 billion into exchange-traded funds specializing in emerging markets since early June.

“Reasonable data from China has opened a window for emerging markets to outperform,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. “Emerging markets have been very strong relative to developed markets in the past week.”

The MSCI Emerging Markets Index gained 3 percent in August, surpassing a 0.4 percent increase in the MSCI World measure of advanced-nation equities.

Stocks

The developing-country gauge rose 0.5 percent to 899.79, bringing four days of gains to 3.6 percent. Posco, South Korea’s largest steelmaker, added 3.3 percent. The country’s credit rating was upgraded by one step to AA by S&P Global Markets on Monday. The Kospi index added 0.6 percent to a nine-month high.

The Borsa Istanbul 100 Index gained 1 percent, rising for a second day. Turkish Airlines climbed 5 percent to the strongest level since July 15. The stock, which is down 22 percent in 2016, has lagged a 9.4 percent increase in the main index. On his first overseas trip since the failed putsch and subsequent crackdown, Erdogan is scheduled to hold talks with Putin in St. Petersburg.

The meeting comes about nine months after Russia’s leader called Turkey’s downing of a Russian fighter jet near the Syrian border a “stab in the back” and imposed a series of punitive sanctions.

The Shanghai Composite Index rose 0.7 percent to a two-week high. China’s producer-price index fell 1.7 percent in July from a year earlier, the National Bureau of Statistics said Tuesday.

In emerging Europe, the PX Index in Prague declined 0.7 percent as the country’s biggest utility CEZ AS slumped 2 percent. The company cut its full-year outlook after reporting first-half earnings that missed estimates.

The MSCI Emerging Markets Currency Index rose 0.3 percent as currencies in Brazil and South Africa strengthened at least 0.9 percent.

“Emerging-market Asia is being helped by risk-on sentiment, with the Korean won buoyed by the S&P rating upgrade,” said Paik Seok Hyun, an economist at Shinhan Bank in Seoul. “This sentiment will probably continue until a U.S. rate hike appears more impending.”

Bonds

The premium investors demand to own emerging-market debt over U.S. Treasuries widened two basis points to 348, according to JPMorgan Chase & Co. indexes.

Indian bonds due in January 2026 yielded 7.13 percent, down five basis points. Presiding over his final interest-rate review before his term ends early next month, Reserve Bank of India Governor Raghuram Rajan left the benchmark repurchase rate at a five-year low of 6.50 percent Tuesday, a move estimated by 27 of 29 economists in a Bloomberg survey.

Policy makers have injected about 800 billion rupees ($12 billion) into buying bonds since April 1, helping drive money-market rates lower and spurring local demand for the securities.

Russian local-currency bonds rose for a fourth day, with the yield on 10-year notes declining three basis points to 8.32 percent.

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