Emerging Stocks Pare Worst Quarterly Drop Since 2011 on China

  • Ruble gains after Syria strikes seen helping to end sanctions
  • Investors pull $40 billion of assets in three months

The Hang Seng China Enterprises Index rose 2.5 percent as Great Wall Motor Co. and Dongfeng Motor Group Co. rallied more than 15 percent after China cut a tax on passenger-vehicle purchases.

Photographer: Tomohiro Ohsumi/Bloomberg

Emerging-market stocks rose, reducing their biggest quarterly drop in four years, as Chinese shares rebounded and developing-nation currencies strengthened.

The Hang Seng China Enterprises Index rose 1.9 percent as Great Wall Motor Co. rallied 20 percent after the country cut a tax on passenger-vehicle purchases. The Shanghai Composite Index trimmed the world’s worst quarterly performance. Russian stocks and the ruble rose as the nation’s approval of air strikes in Syria fueled speculation a detente in Russia-U.S. relations could end sanctions. South Africa’s rand climbed the most in two weeks versus the dollar. Brazil’s real strengthened for a second day, trimming the biggest decline among developing-nation currencies in the July-to-September period.

The MSCI Emerging Markets Index rose 2 percent to 792.05 , paring its loss since the end of June to 19 percent. Investors pulled $40 billion out of developing economies in the third quarter, fleeing at the fastest pace since the 2008. The selloff came amid China’s faltering economy, a commodities rout and prospects of an increase in the the near-zero U.S. interest rates that have supported demand for riskier assets. Traders pulled $404 million from U.S. exchange-traded funds that invest in developing nations in the five days through Tuesday, according to data compiled by Bloomberg.

Quarterly Outflows

"As the current macroeconomic backdrop is unlikely to change over the upcoming weeks I expect EM currencies and stocks to remain under selling pressure," said Bernd Berg, a London-based emerging-markets strategist at Societe Generale. "Outflows might accelerate in the fourth quarter unless we see improving Chinese data or a rebound in commodity prices."

The quarterly outflow was the first since 2009 and the biggest since the final three months of 2008, when traders sold $105 billion of assets, according to the Institute of International Finance. About $19 billion of the selloff was equities, with the remaining $21 billion in debt, the IIF said in a report Tuesday. There were outflows in all three months this quarter.

MSCI’s developing-markets index is trading at 10.6 times projected 12-month earnings, near the cheapest level since March 2014, data compiled by Bloomberg show. The MSCI World Index declined 8.9 percent in the third quarter and is valued at a multiple of 14.7. A Bloomberg gauge of developing-nation currencies 8.3 percent in the past three months.

Real Depreciation

Russia’s Micex Index added 0.8 percent and the ruble strengthened 0.5 percent versus the dollar, reducing its quarterly drop to 16 percent. Russia launched air strikes in Syria two days after President Vladimir Putin and his U.S. counterpart discussed ways to cooperate on fighting Islamic State, the Associated Press reported, citing an unidentified U.S. official.

"In exchange for help in Syria, Russia may lobby an easing of sanctions or their complete cancellation," Vladimir Vedeneev, chief investment officer at Raiffeisen Asset Management in Moscow, said by e-mail.

South African equities climbed 1.4 percent, halting a three-day drop. The rand and Turkey’s lira have weakened at least 11 percent since the end of June, set for their sharpest declines in four years. Brazil’s real led a depreciation in currencies in the third quarter, sliding 22 percent as Standard & Poor’s cut the country’s credit rating to junk amid political turmoil and a corruption probe into a state-controlled oil company.

Yield Spread

The extra yield investors demand to own emerging-market debt over U.S. Treasuries climbed to the highest level since October 2011 this week, according to JPMorgan Chase & Co. indexes.

All 10 industry groups in the emerging stocks measure rose on Wednesday, paced by consumer-discretionary shares and energy companies. Great Wall Motor and Dongfeng Motor Group Co. jumped the most since 2008. Geely Automobile Holdings Ltd. rallied 16 percent. China lowered a tax on passenger-vehicle purchases and said it will support the adoption of electric vehicles following a slump in industrywide sales.

China’s financial markets will be shut from Thursday for week-long National Day holidays. The statistics bureau is scheduled to release an official manufacturing index for September on Thursday. The reading will probably be 49.7, unchanged from a month earlier, according to the median estimate of economists surveyed by Bloomberg. A reading below 50 indicates contraction. 

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