Emerging Markets, Currencies Look Ripe to Short Sell

Emerging-market stocks and currencies are luring global investors for all the wrong reasons right now.

A quarterly Bloomberg Global Poll showed there was a two-fold surge in the number of respondents who identified developing-nation equities and currencies as the assets they’d most like to bet against. For currencies, the percentage jumped to 12 percent from 6 percent in November while for stocks, it rose to 7 percent from 3 percent.

Investor confidence in emerging markets is faltering as China posts the slowest economic expansion in 24 years, Russia remains embroiled in the Ukraine conflict and Brazil slips into stagflation. Add to this a stronger dollar and the prospect for higher interest rates in the U.S. -- both of which drive up debt-servicing costs for developing nations -- and many see an environment conducive to further losses. Emerging-market stocks have been sinking since September, pushing the benchmark gauge down 11 percent, while currencies began slumping in July.

“Indiscriminate risk taking in emerging markets in recent years has led to some disappointments,” Andreas Domke, a poll participant and portfolio manager at Allianz Global Investors Europe GmbH in Frankfurt, said by phone on Jan. 21. “Investors are asking whether there are adequate rewards for the risks. I can imagine some people got burned.”

Slowing Growth

The declines in the second half of last year extend a slump that began in early 2013. The MSCI Emerging Markets Index fell about 5 percent in each of the past two years, the first consecutive annual declines since 2002. The gauge climbed 0.6 percent at 9:50 a.m. in New York. A Bloomberg index tracking 20 major developing-country currencies retreated 20 percent against the dollar over that time to a 13-year low, led by plunges in the ruble, rand and lira.

Only overseas bonds issued by developing nations have provided a positive return, gaining 9 percent over the past 12 months, according to data compiled by Bloomberg. Still, investors have piled into bets against the $4.1 billion iShares J.P. Morgan USD Emerging Markets Bond ETF, sending short interest to 21 percent of shares outstanding, from just 7.8 percent in November, according to data compiled by Bloomberg and Markit Group Ltd.

Investor interest in betting against emerging-market debt was stable in the poll. Six percent of the investors, traders and analysts who took part in the survey said it was the asset they’d most like to sell short, matching the November figure.

The survey of 481 Bloomberg subscribers was conducted Jan. 14-15 by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 4.5 percentage points.

Bearish Trades

Of the 11 asset classes listed as options to sell short, only two -- Group of Seven government bonds and junk bonds -- attracted more respondents than emerging-market stocks.

One of the main reasons is that economic growth, long a strength for developing nations, is sputtering. Earlier this week, the International Monetary Fund cut its forecast for the 2015 expansion across developing nations to 4.3 percent from an earlier estimate of 5 percent. It’d be the slowest expansion in six years.

The risk of capital flight may become more acute once the Federal Reserve starts raising interest rates after six years of record low borrowing costs, the IMF warned on Jan. 19. That may squeeze companies in developing countries, which boosted their foreign-currency debt outstanding to $1.2 trillion from $341 billion at the end of 2008, according to Bank of America Corp.

“Emerging markets have got a structural problem -- the dollar is in short supply,” Julian Brigden, managing partner of Macro Intelligence 2 Partners, who participated in the poll, said by phone from Hoboken, New Jersey.

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