Emerging Markets Extend Losses as Fed Wake-Up Call Halts Rally

Do EM Local Currency Assets Still Offer Value?
  • FOMC minutes show officials were split on need for rate hike
  • Saudi Arabian shares decline after commodity prices fall

Emerging-market stocks fell for a second day and currencies retreated from a 13-month high as renewed prospects for a U.S. interest-rate increase this year sapped risk appetite.

Saudi Arabian shares dropped the most since late May. Egypt’s benchmark index slid for a second day as Commercial International Bank, which accounts for 40 percent of the gauge by weight, posted its biggest drop in five weeks. Benchmark indexes in Mexico and Russia fell at least 0.2 percent. South Korea’s won weakened the most among developing-nation currencies.

Developing-nation assets remained lower after minutes from the Federal Reserve’s July meeting showed that policy makers were split on whether a rate increase was needed soon. New York Fed President William Dudley said this week that investors may be underestimating the odds, while Dennis Lockhart of Atlanta said accelerating economic growth may warrant at least one increase in 2016. Stocks and currencies in emerging markets are falling after the best year-to-date gains since 2009 spurred concern they had become too pricey.

“Emerging markets have had a huge rally since Brexit and some profit-taking is only healthy,” said Nathan Griffiths, who helps oversee about $1.1 billion as a senior money manager at NN Investment Partners in The Hague. “If it was not Fed comments, it would have been something else. But as long as the dollar doesn’t strengthen from here and general monetary policy remains benign, the gains can resume.”

While Britain’s vote on June 23 to leave the European Union caused an immediate selloff in emerging-market assets, it also led investors to believe that the resulting economic uncertainty would compel the Fed to keep rates lower for longer. That optimism took stock valuations to a 15-month high and attracted almost $17 billion of inflows over the past 11 weeks into U.S. exchange-traded funds that invest in developing nations.

Futures traders see a 51 percent chance of a move in December, compared with 41 percent odds a week ago, data compiled by Bloomberg show.

The MSCI Emerging Markets Index dropped 0.7 percent to 909.67. The gauge has climbed 14 percent this year and trades at 12.6 times the projected earnings of its members, above the average valuation of 10.7 in the past five years. Nine of the 10 industry subgroups retreated, led by the materials sector.

“We have been overweight for a couple of months when the market started to rally,” said Geoffrey Ng, who oversees $260 million as an investment adviser at Fortress Capital Asset Management Sdn. in Kuala Lumpur. “For now, it could be a time to take a breather.”

Currencies, Bonds

The Tadawul All Share Index declined 1.7 percent in Riyadh, for a third day of losses. Egypt’s EGX 30 Index slid 0.5 percent as CIB’s 1.5 percent drop contributed most to the decline. The Ibovespa gained 0.8 percent after Brazil raised its gross domestic product forecasts.

Orion Corp., a South Korean foodmaker, tumbled 13 percent in Seoul after earnings missed estimates. The Kospi index fell 0.2 percent. Indonesia’s market was shut for a holiday.

Turkish bonds dropped, with the yield on 10-year sovereign debt increasing 11 basis points to 9.74 percent. The rate on similar-maturity notes in China rose three basis points to 2.7 percent.

The premium investors demand to own emerging-market sovereign debt rather than U.S. Treasuries widened three basis point to 334, according to JP Morgan Chase & Co. Indexes.

The MSCI Emerging Markets Currency Index lost 0.5 percent, paring its increase this month to 1.3 percent. The won weakened 1.5 percent, the most since June 24, while Malaysia’s ringgit and the Mexican peso lost 0.7 percent.

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