Emerging Markets Halt Brexit Decline as Fed Turns More Dovish

  • Fewer officials see more than one U.S. rate increase this year
  • MSCI’s China decision spares smaller markets of competition

Developing-nation stocks and currencies ended a four-day streak of losses as the Federal Reserve signaled that it will increase U.S. interest rates more slowly than previously projected, propping up demand for riskier assets.

Equity benchmarks from South Africa to Hungary and India each advanced at least 1 percent. Chinese stocks traded in Hong Kong rose as MSCI Inc.’s decision Tuesday not to include mainland shares in its indexes meant there won’t be a rush to shift money into Shanghai. Russia’s ruble gained for the first time in a week as most developing-nation exchange rates strengthened against the dollar.

Stocks and currencies extended gains after projections released by the Federal Open Market Committee showed that the number of officials who see just one interest rate increase this year rose to six from one in the previous forecast in March. Low borrowing costs in the U.S. have boosted the appeal of higher-yielding assets in developing nations. The Fed’s new projection helped ease concern about the impact of a potential British exit from the European Union, which has weighed on markets for the past four sessions.

“A slowdown in the pace of increases combined with better valuations in emerging markets signal that developing nations could be an attractive investment destination,” said Audrey Kaplan, head of the International Equities team at Federated Investors. “There are global concerns, from Brexit to negative interest rates to a slowdown in growth, and the Federal Reserve needs to see more consistent data before it increases rates.”

The MSCI Emerging Markets Index rose 0.6 percent to 808.19, ending a four-day decline of 4.7 percent. The developing-nation equity benchmark trades at 11.7 times the projected earnings of its members, about 26 percent below the valuation for developed-nation stocks.

Chinese stocks jumped the most in two weeks, spurring speculation that state-backed funds may be supporting the market after the MSCI decision. The Shanghai Composite Index is still down 18 percent for the year. The Hang Seng China Enterprises Index added 0.3 percent in Hong Kong. China’s domestic equities were denied entry into MSCI benchmarks for a third time, with the index compiler saying policy makers need to make additional improvements to the accessibility of the A-share market.

India, Pakistan

“The decision by MSCI not to include Chinese A-shares was a blessing for other Asian markets as it would have shifted investors’ portfolios,” said Jeffrosenberg Tan, an associate director at PT Sinarmas Securities in Jakarta.

Indian stocks climbed for the first time in five days as a selloff in Asia eased and investors bet that foreign buying of the nation’s shares will now accelerate. In Nigeria, stocks rallied 3.2 percent and naira forward contracts surged to a record. The African nation’s central bank said it will allow the naira exchange rate to be market-driven, setting the stage for a devaluation of as much as 36 percent when a new trading system comes into effect June 20.

Pakistan’s Karachi Stock Exchange KSE100 Index jumped 2.8 percent to a record after the nation’s equities were upgraded to emerging-market status. Asia’s best-performing equity market of 2016 may attract about $220 million of inflows, JPMorgan Chase & Co. said in a note. Other estimates project inflows of as much as $475 million by mid-2017.

Currencies, Bonds

The Ibovespa advanced 0.5 percent from a two-week low in Sao Paulo. Vale SA, the world’s largest iron-ore producer, helped boost the equity gauge, rallying 3.2 percent amid speculation that China is planning to increase its stockpiles of base metals.

The MSCI Emerging Markets Currency Index climbed 0.2 percent, ending a 1.4 percent slide during the previous four days. The ruble strengthened 0.9 percent against the dollar. Colombia’s peso gained 1 percent.

A gauge of expected swings in India’s rupee capped its biggest two-day jump since August amid signs demand for local assets is waning as anxiety about global central bank meetings and a potential British exit from the European Union grips investors. Outflows for June climbed to 20.7 billion rupees ($308 million), data compiled by Bloomberg show. The currency rose two percent after four days of losses.

The yield on Poland’s 10-year government notes fell four basis points to 3.27 percent, while the rate on South Africa’s benchmark 2026 bond dropped six basis points to 9.13 percent.

The premium for emerging-market sovereign debt increased three basis points to 410, according to JPMorgan Chase & Co. indexes.

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