Emerging Stocks Rise as Chinese Manufacturing Slump Stabilizes

  • Technology, raw-material stocks lead gains in MSCI index
  • Investors seek bargains after worst stocks rout in four years

Stabilizing Chinese PMI Offers Investors Some Reassurance

Emerging-market equities rose for a second day as signs China’s manufacturing is stabilizing gave investors confidence to hunt for bargains after the worst quarter in four years.

While data showed Chinese factory output continued to slump in September, the pace of the contraction unexpectedly slowed, easing concern that the world’s second-biggest economy will act as a drag on global growth. Assets in some nations that count China among their biggest trading partners rallied. Shares in Johannesburg headed for the biggest two-day advance since Sept. 17 as the rand strengthened to a one-week high against the dollar. Markets in Shanghai and Hong Kong were closed for a holiday.

“Numbers tell us that Chinese manufacturing is stabilizing and is not in a free fall,” Hertta Alava, who helps oversee the equivalent of $395 million as the head of emerging markets at FIM Asset Management Ltd. in Helsinki, said by e-mail. “Good numbers from China are important for all emerging markets. They reduce the risk of further yuan devaluation and are also supportive for commodities.”

Developing-nation equities lost $4.3 trillion in market value during the third quarter when investors dumped riskier assets amid worse-than-estimated economic data from China, a surprise devaluation of the yuan and speculation about the timing of an increase in U.S. interest rates. That depressed valuations of stocks in the MSCI Emerging Markets Index to 10.7 times projected earnings, below their 10-year average and 28 percent cheaper than the advanced-country shares.

ETF Outflows

The developing-nation stock gauge rose 0.7 percent to 797.61, following Wednesday’s 2 percent gain. The gauge fell for a fifth straight month in September, extending its quarterly loss to 19 percent. China’s markets are shut for a week, while Hong Kong’s will reopen Friday.

Investors pulled $6.1 billion from exchange-traded funds tracking developing-market stocks in the three months through September, the most in over a year, according to data compiled by Bloomberg. ETFs that invest in both emerging-market stocks and debt as well as individual countries saw outflows in 12 out of 13 weeks ending Sept. 25, with losses totaling $12 billion, the data show.

Money flows in emerging-market funds are trailing developed nations by a degree unmatched except in 2004, 2005, 2008 and 2014, Ian Scott of Barclays Capital said. citing EPFR Global data. If history is any indication, this should lead to a turnaround, and stocks in emerging markets should outperform developed nations over the next six months, he said.

Domestic Manufacturing

The FTSE/JSE All Share Index of South African shares rose 0.9 percent, pushing its two-day gain to 2.3 percent. Adding to optimism from the Chinese data, a purchasing managers’ index of domestic manufacturing for last month rose in line with economist estimates. The rand strengthened 0.5 percent against the dollar.

Stocks in Brazil, which sends 21 percent of its exports to China, rose for a third day. The Ibovespa equity benchmark gained 0.3 percent, with a 4.5 percent increase in iron-ore producer Vale SA contributing the most to the advance. The real weakened 1.6 percent against the dollar, slumping the most among its emerging-market peers after lawmakers approved amendments to a retirement bill that would boost government spending, dealing a blow to efforts to shore up the country’s finances.

South Korea’s won and the Colombian peso each strengthened 0.8 percent, leading gains in developing nations. A gauge of 20 emerging-market currencies was little changed after fluctuating between gains and losses.

The premium investors demand to hold emerging-market debt rather than U.S. Treasuries narrowed four basis points to 429 basis points, according to JPMorgan Chase & Co. indexes.

Before it's here, it's on the Bloomberg Terminal.