Emerging-Market Stocks Rally as U.S. Outlook Fuels Risk Demand

Why Are Downgrades Accelerating in Emerging Markets?
  • Three-day advance has erased losses over previous three weeks
  • South Africa’s rand leads developing-nation currencies higher

Emerging-market stocks rose to their highest level since July 2015 and currencies strengthened as data showing slower-than-forecast growth in the U.S. services industry bolstered speculation that the Federal Reserve will move slowly in raising interest rates.

The MSCI Emerging Markets Index rose for a third day, rallying 1.5 percent to 923.45. All 10 industry groups advanced, led by technology and consumer discretionary stocks. The rand strengthened the most among developing-nation currencies after data showed South Africa’s economy grew more than expected in the second quarter.

Developing-nation stocks have now made up all of the ground they lost over the last three weeks, as disappointing U.S. jobs growth damped speculation the Federal Reserve would raise interest rates in September. Futures traders further reduced the odds of a Fed move as data released Tuesday showed that service industries in the world’s largest economy expanded in August at the weakest pace in six years, joining manufacturers in an abrupt slowdown that may signal waning optimism about the economy.

“Developing countries, especially several Asian countries, will continue to have much higher economic growth rates that most developed markets,” said Voravan Tarapoom, the Bangkok-based chief executive officer at BBL Asset Management Co., which oversees $15 billion. “We’re upbeat on their equities compared with developed markets.”

ETFs Grow

Investors have added money to exchange-traded funds that buy emerging market stocks and bonds for 14 straight weeks totaling $19.5 billion, the longest stretch in more than a year. Low Fed interest rates support demand in developing nations as investors seek higher-yielding assets.

The emerging-market equity benchmark has rallied 17 percent in the past six months, compared with an 8.6 percent gain in the MSCI World Index of developed-market stocks. Following this increase, companies on the developing-nation gauge are trading at an average of 12.1 times projected earnings for the coming year, a 26 percent discount to developed-world peers.

The Ibovespa increased 1 percent, rising for the third time in four days. Lender Itau Unibanco Holding SA and Banco Bradesco SA were the biggest contributors to the Brazilian benchmark, each gaining at least 1 percent.

India, Russia

The S&P BSE Sensex Index rose 1.6 percent to the highest since April 2015 in Mumbai. Tata Motors Ltd., owner of Jaguar Land Rover, rallied to the highest in 18 months, while Maruti Suzuki India Ltd., India’s largest carmaker, and two-wheeler producer Hero MotoCorp Ltd. climbed to records.

The Micex Index added 1.1 percent in Moscow, gaining for a fourth day, as energy producers Gazprom PJSC and Lukoil PJSC rallied. Oil, Russia’s biggest export, fell 0.8 percent in London Tuesday after rallying 4.8 percent in the previous two trading days.

The rand strengthened 2.9 percent to 13.9825 per dollar, leading gains among 24 emerging-market currencies tracked by Bloomberg. Economic growth of 3.3 percent in the second quarter beat a median projection for 2.6 percent growth from 19 economists surveyed by Bloomberg. The MSCI Emerging Markets Currency Index gained 0.8 percent.

Russia’s ruble rose 0.8 percent. The allure of higher Russian yields relative to developed markets will survive a widely expected rate cut next week, according to strategists at ING Groep NV who forecast the central bank will probably reduce its benchmark by 50 basis points to 10 percent when it meets Sept. 16.


The premium investors demand to own emerging-market bonds rather than U.S. Treasuries widened three basis points to 339, according to JPMorgan Chase & Co. indexes.

The time of “indiscriminate buying” is coming to an end and investors need to exercise caution or face being caught in a selloff if sentiment changes, Sergio Trigo Paz, head of emerging-market debt at BlackRock said in a Bloomberg TV interview on Monday.

The yield on local South African bonds maturing in December 2026 decreased 14 basis points to 8.73 percent. Similar-maturity Polish bond yields declined nine basis points to 2.79 percent.

The rate on Turkey’s 10-year debt dropped for a third day, declining seven basis points to 9.61 percent. U.S. money managers Eaton Vance Corp. and Newfleet Asset Management LLC are among investors who are sticking to or raising positions in Turkish bonds. More than $4 billion has flowed into the nation’s local-currency bonds this year, with $638 million arriving since the botched coup in July and most of that in the week ending Aug. 26, according to the latest central bank data.

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