Emerging Markets Spring Back to Life as Fed Spurs Fresh Gains

Emerging Markets Appear Well-Placed to Perform: Hatheway
  • Dovish tone creates ‘Indian summer’ for rally: Credit Agricole
  • Benchmark equity gauge rallies the most in six weeks

The Federal Reserve has given fresh impetus to emerging markets.

As Russia joined Argentina in announcing a Eurobond sale, stocks from Istanbul to Johannesburg rallied at least 2 percent. The Ibovespa rallied for a fourth day amid speculation that Brazil may reduce borrowing costs sooner than previously expected, aiding in the effort to recover from recession. A gauge of developing-nation exchange rates jumped the most since late June.

Pledges to keep monetary policy accommodative from the Fed and Bank of Japan this week have emboldened the hunt for higher-yielding assets by investors seeking to escape near-zero rates in much of the industrialized world. Exchange-traded stock and bond funds registered $20.5 billion of uninterrupted inflows in the past 16 weeks.

“The Fed’s dovish tone has created an Indian summer for the rally in emerging markets,” said Guillaume Tresca, a senior emerging-market strategist at Credit Agricole CIB in Paris, who recommends buying the rand in the short term. “High-yielders are fashionable again. We expect inflows, but not as much as during the summer. Investors have become more discriminate.”

Following the Fed’s decision to keep U.S. interest rates on hold on Wednesday:

  • Russia sold $1.25 billion of debt in its first Eurobond issuance since sanctions were imposed
  • Argentina announced investor meetings for a benchmark-sized euro-denominated bond
  • Yields on 10-year Turkish bonds, the worst performers in emerging markets this quarter, fell the most since May
  • Russia’s ruble strengthened for a second day as oil sold for more than $47 a barrel in London
  • The lira strengthened for a second day as Standard Chartered increased its year-end forecast for the Turkish currency to 2.90 per dollar from 3.10
  • MSCI emerging market stock and currency gauges reversed last week’s losses

The MSCI Emerging Markets Index rallied the most in six weeks, rising 1.7 percent to 920.29. The gauge has increased 4 percent in the past four days after posting a 2.6 percent drop last week. All 11 industry groups advanced on Thursday, led by consumer and raw-material stocks.

Stock Outperformance

Companies on the benchmark equity gauge trade at an average valuation of 12.7 times projected 12-month earnings, compared with a multiple of 16.3 for the MSCI World Index of advanced-nation shares. Appetite for riskier assets has helped the developing-world measure rally 16 percent this year, compared with a 4.7 percent gain in developed-nation stocks.

The MSCI Emerging Markets Currency Index climbed 0.6 percent Thursday as the dollar weakened after the Fed Open Market Committee trimmed its forecasts for future interest-rate increases. The premium investors demand to hold emerging-market bonds over U.S. Treasuries narrowed four basis points to 330.

While investors have been bullish on developing countries all year, money flowed into funds that passively track emerging-market stock and bond indexes at the slowest pace in three months last week amid concern the Fed and the Bank of Japan would curb stimulus.

Bond Rush

The Fed’s so-called “dot plot,” which policy makers use to signal their outlook for borrowing costs, shows they see only two moves next year, down from a June projection of three. The gradual pace of increases is poised to support the argument for investing in emerging markets.

Morgan Stanley and Goldman Sachs Group Inc. said in the past week that the countries have stronger economic fundamentals than they did during the so-called 2013 taper tantrum, putting them on a better footing to withstand a move away from ultra-loose monetary policy.

Russia offered $1.25 billion of 4.75 percent bonds in a tap of the 2026 notes it sold in May, according to the Finance Ministry. The Eurobonds were priced at 106.75 percent of face value, and more than half were bought by U.S. investors, the ministry said.

Emerging-market bonds are an asset class that is “here to stay” because Fed policy suggests there’s unlikely to be any aggressive dollar appreciation, Peter Kinsella, the head of emerging-market economic and foreign-exchange research at Commerzbank AG in London, said in an interview. “Yield pick-up in EM U.S.-dollar denominated issuance is going to stay for quite some time.”

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