Emerging-Market Stocks Drop as Fed, China Boost Risk-Off Wagers

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  • Currencies weaken against the dollar for a fifth day in a row
  • Chinese shares in Hong Kong drop on disappointing earnings

Emerging-market stocks fell the most this month and currencies weakened as the odds of the Federal Reserve raising U.S. interest rates before year-end increased and Chinese corporate earnings disappointed investors.

The MSCI Emerging Markets Index fell 1.7 percent to 846.14 in New York. A gauge of 20 currencies slid for a fifth day, led by the South African rand. The Hang Seng China Enterprises Index slid 1.1 percent in Hong Kong as China Life Insurance Co. tumbled 5.4 percent after reporting lower profit. The Ibovespa declined as Brazilian exporters including iron-ore producer Vale SA slumped.

Fed futures traders now see a 50 percent chance of a December liftoff in U.S. interest rates, up from 35 percent on Tuesday, after the U.S. central bank dropped a reference to global risks and said growth remains “moderate.” Speculation that the Fed’s near-zero borrowing costs would be kept low for longer had spurred a rally of as much as 9.7 percent this month in the developing-nation stock gauge. The gains have since been pared to 6.8 percent. Stocks in Shanghai have slumped 34 percent since June as the world’s second-largest economy is forecast to expand at the slowest pace in 25 years.

The next Fed interest-rate move will be “largely symbolic,” while investors will pay more close attention to what policy makers say about the magnitude of further increases, Wayne Lin, who helps manage $1.5 billion as money manager at QS Investors LLC, said by phone on Thursday. Until then, developing-nation assets will probably continue to “limp along” and “we don’t think that it’s the time to jump in right now,” he said.

The MSCI developing-nations gauge has retreated 12 percent this year and trades at 11.1 times projected 12-month earnings, below its 10-year average, data compiled by Bloomberg show. That’s 30 percent cheaper than the valuation for advanced-nation stocks.

Russia’s Micex Index retreated 1 percent and the ruble weakened 0.7 percent, while the South African equity benchmark dropped for a fourth day and its currency fell 1.3 percent. MTN Group Ltd. lost 0.9 percent, extending its declines this week to 19 percent. MTN has fallen for four days after announcing that it faces a $5.2 billion fine from the Nigerian telecommunications regulator put pressure on shares.

The Ibovespa fell 2.4 percent to a four-week low. JBS SA tumbled the most in 10 weeks, dropping 4.8 percent after the meatpacker’s unit in the U.S. posted disappointing quarterly results. Vale slid 1.7 percent.

Budapest Trading

The Budapest Stock Exchange suspended trading in the shares of OTP Bank Nyrt after Hungary’s government offered to sell a 5 percent stake in the country’s largest lender. Budapest-based brokerage Equilor Befektetesi Zrt. is conducting the sale of more than 14 million shares four years after the government acquired OTP shares in a takeover of privately-managed pension assets. Equities in Hungary and Poland declined 0.5 percent and 1.8 percent respectively.

The Hang Seng China Enterprises gauge posted its biggest three-day drop in a month. China Life Insurance fell the most since Aug. 24 after a 74 percent slide in third-quarter profit. The Shanghai Composite Index rose 0.4 percent.

The two Chinese equity gauges have rebounded 11 percent this month after the government took measures to stabilize the mainland stock market following a $5 trillion rout and the economy.

Samsung Electronics Co. rose 1.3 percent to a four-month high as the company looks to tap its $50 billion cash pile to buy back shares and invest in its components business after struggles in the smartphone division battered investors. South Korea’s Kospi Index lost 0.4 percent, its third day of declines.

Currency Selloff

“The only liquidity that really matters for EM assets is USD liquidity, as this has been the funding currency for debt and growth for so long,” said Nathan Griffiths, who oversees about $800 million in emerging-market stocks as a fund manager at NN Investment Partners in the Hague, adding that any further easing from the European Central Bank and the Bank of Japan would put more “upward pressure” on the dollar, affecting emerging markets negatively.

South Africa’s rand fell 1.3 percent and Russia’s ruble slumped against the dollar as oil prices retreated in London. The real advanced the most in two weeks while the South Korean won fell 1 percent and the Turkish lira dropped 6 percent against the dollar. Malaysia’s ringgit fell for a third day.

“You’ve seen a bit of a currency selloff here in the emerging markets,” Geoffrey Pazzanese, global equity fund manager at Federated Investors Inc., said by phone on Thursday. “Especially some of the more risky ones, Turkey, South Africa, the ruble, that have high current account deficits.”

All 10 industry groups in the emerging-stocks measure dropped Thursday, paced by consumer and raw-material stocks. The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed seven basis points to 383 basis points, according to JPMorgan Chase & Co. indexes.