Emerging-Market Stocks Drop as Energy Slump Outweighs China Gain

Updated on
  • Brazil’s benchmark gauge drops on report Bradesco CEO indicted
  • Shanghai Composite jumps on MSCI index inclusion speculation

Emerging Markets Stocks Rise to 3-Week High

Emerging-market stocks fell for a second day as energy shares slid with oil and Brazil’s benchmark gauge dropped to a seven-week low on renewed corruption concerns. Yuan-denominated equities rallied in China amid speculation MSCI Inc. will include them in its global indexes.

The MSCI Emerging Markets Index slipped less than 0.1 percent to 807.45. Energy companies retreated the most among 10 industry groups, declining 1.6 percent as Brent crude prices retreated. Banco Bradesco SA led declines in Brazil after its chief executive officer was indicted on corruption and money laundering accusations. The Shanghai Composite Index surged 3.3 percent, the most since March.

The developing-nation equity benchmark erased an earlier gain as Brent crude slipped 0.1 percent to $49.69 a barrel after rising as much as 0.6 percent. The gauge has fallen 3.9 percent in May. A measure of developing-nation currencies rose less than 0.1 percent Tuesday to end the month with a 3 percent decline.

“Crude oil didn’t crash down but it pretty steadily declined,” Tim Ghriskey, who oversees $1.5 billion as managing director and chief investment officer at Solaris Asset Management, said by phone. “It hurts Brazil certainly, hugely, and it hurts Russia.”

China Rally

The ruble and the real weakened the most among emerging-market currencies on Tuesday.

Chinese shares rallied after Goldman Sachs Group Inc. said the probability they will win MSCI inclusion has increased to 70 percent from 50 percent just last month thanks to new rules aimed at curbing trading halts and a clarification by the regulator about beneficial ownership rules.

For details on Goldman Sachs’s view on China stocks MSCI inclusion, click here.

Bradesco fell 5 percent in Sao Paulo, contributing the most to the Ibovespa’s 1 percent decline. The stock tumbled after the newspaper O Estado de S.Paulo reported that Chief Executive Officer Luiz Carlos Trabuco Cappi and two other company executives were indicted amid a probe into alleged fraud in tax cases. Federal prosecutors confirmed the indictments.

Investors have been whipsawed by corruption probes and political turmoil that has rippled throughout Brazilian markets, including the removal of Dilma Rousseff from office to face impeachment proceedings.

“The corruption in Brazil is widespread and very concerning to investors,” Ghriskey said. “There needs to be a massive cleanup.”

ETF Outflows

South African stocks fell 1 percent Tuesday, reducing a fourth straight monthly gain. Equities have rallied as a slump in the rand in May boosted the outlook for companies with revenue in foreign currencies such as Naspers Ltd.

Investors withdrew more than $200 million from exchange-traded funds that invest in emerging markets last week, bringing this month’s losses to $5 billion. Outflows from emerging-market ETFs that invest across developing nations as well as those that target specific countries totaled $202.2 million, compared with $1.91 billion in the previous period, according to data compiled by Bloomberg.

Ruble, Rand

The ruble dropped 1.4 percent, extending a decline in May to 3.1 percent. While the currency of the world’s biggest energy exporter has rallied the most in the world this year, its strength may prove unsustainable without further gains in crude, the central bank’s research and forecasting department said in a report published on Monday.

South Africa’s rand declined 9.4 percent in May, the biggest monthly retreat since May 2013. S&P is due to announce the results of its credit-rating review on the country on Friday, with four out of 13 analysts surveyed by Bloomberg expecting a cut to below investment grade.

Brazil’s real fell 1.2 percent Tuesday and 4.9 percent for the month.

Russian five-year government bonds fell, lifting the yield one basis point to a one-month high of 9.23 percent. The rate on 10-year South African bonds retreated seven basis points, paring a jump this month to 42 basis points, the most this year.

The premium investors demand to own emerging-market debt over U.S. Treasuries increased one basis point 396, according to JPMorgan Chase & Co. indexes.