Emerging-Market Bears Want More as Stocks See CorrectionYe Xie
Investors are ramping up bets that the selloff in emerging-market stocks isn’t over after the benchmark index plunged 9.4 percent from a three-year high reached in September.
Shares of the $38 billion iShares MSCI Emerging Markets exchange-traded fund being shorted have jumped more than four-fold over the past month to about 44 million, or 4.9 percent of all outstanding securities, near the most since June, according to data compiled by Markit and Bloomberg. The MSCI Emerging Markets Index fell 0.4 percent yesterday to 992.53, the lowest since March 28. Earlier in the day, the index slid as much as 0.8 percent, touching a level that left it down 10 percent from its September high, a percent move that traders consider a correction.
After a six-month rally sparked optimism that three years of under performance in emerging markets had run its course, sentiment has soured again as growth from China to Russia slows. Brazil’s Ibovespa Index has lost 12 percent over the past month, the second biggest decline in the world, as President Dilma Rousseff’s widening lead in polls ahead of the Oct. 5 vote dashed speculation that a new administration would take office and rekindle economic growth.
“The growth rate across emerging markets has been eroding,” John-Paul Smith, chief executive officer at Eclectic Strategy in London and a former Deutsche Bank AG strategist who correctly predicted the developing-nation stock selloff last year, said by phone yesterday. “I am pretty cautious. There are relatively few safe havens in emerging markets.”
Investors have pulled about $3.2 billion from the ETF, the seventh-largest in the world, since Sept. 2, data compiled by Bloomberg show. The fund gained 0.8 percent to $41.27 as of 2:29 p.m. in New York, trimming its retreat since Sept. 5 to 10 percent.
Redemptions from ETFs that invest across developing nations as well as those that target specific countries totaled $1.27 billion in the week ended Oct. 2, compared withs inflows of $60.1 million in the previous week, according to data compiled by Bloomberg. The biggest change was in China and Hong Kong, where funds shrank by $278.2 million.
While stocks have declined over the past month amid signs of economic weakness from Europe to China and geopolitical turmoil in Hong Kong and Ukraine, developing nations have been hit the most, accounting for nine out of the 10 worst performing stock markets globally. Benchmarks in Brazil, Turkey, Colombia and Hong Kong fell at least 8 percent.
The MSCI gauge rose 0.6 to 997.94 today. It declined in all but three sessions since setting a three-year high on Sept. 3. It is down 0.5 percent for the year, extending its decline over the past four years to 8.1 percent. The Standard Poor’s 500 Index has risen 6.6 percent this year.
Economic growth in developing countries is struggling to gather momentum as exports languish. China’s industrial production expansion fell to a five-year low last month, pointing to a deepening slowdown that threatens the government’s 7.5 percent growth target this year.
In Russia, the central bank intervened for the first time since May this week as sanctions from the European Union and the U.S. pushed the ruble to record lows and put the economy on the verge of a recession.
Adding to the woes, the Federal Reserve is on course to end its bond-buying program this month, fueling concern that it may drain capital away from developing nations. While the European Central Bank yesterday announced plans to boost credit and stave off deflation, it disappointed some investors who were expecting more aggressive stimulus measures.
“For EM assets to do well from the standpoint of global factors, you do one of two things or even a combination of those two: you need signs that the global growth outlook is improving, or you need a supportive global liquidity backdrop,” Benoit Anne, head of emerging-market research at Societe Generale SA in London, wrote in a note yesterday. “Right now, I am observing none of the above.”
Political risks are rising from Indonesia, Brazil to Hong Kong, weighing on investor sentiment.
Indonesia’s Jakarta Composite Index tumbled 1 percent today, capping a weekly drop of 3.6 percent, the most since March, on concern a new house speaker will hinder President-elect Joko Widodo’s plans to boost growth.
Brazil’s Ibovespa index reached an almost four-month low on Oct. 1 as investor reacted to the prospect that Rousseff’s re-election may mean a continuation of policies that have tipped Latin America’s biggest economy into its first recession in five years. The index rose 1.5 percent today.
Rousseff would win 49 percent of votes in a potential runoff against candidate Marina Silva, who would garner 41 percent, according to a Datafolha poll published Sept. 30 with a margin of error of plus or minus 2 percentage points.
Argentine bond and stock markets deepened their losses after this week’s resignation of Central Bank President Juan Carlos Fabrega dimmed the prospect of a second peso devaluation this year. The Merval stock index sank 7.1 percent yesterday, bringing its plunge to 15 percent since President Cristina Fernandez de Kirchner on Sept. 30 publicly criticized the bank for allegedly leaking inside information.
The Hang Seng Index rose 0.6 percent today from a three-month low on Sept. 30 as pro-democracy protests crippled parts of the city over the past week.