Photographer: Patricia Monteiro/Bloomberg

Emerging Markets Erase Brexit Losses as Contagion Concerns Wane

  • Stock benchmark gains 4.1% this week, most in four months
  • Brazilian real, South African rand lead currencies higher

Emerging-market stocks rose for a fourth day, erasing post-Brexit losses, on signs that global central banks will act to avoid economic contagion from the U.K.’s vote to leave the European Union.

The MSCI Emerging Markets Index rose 0.6 percent to 839.25, 3.8 points above the closing level on the June 23 referendum day. The benchmark posted a 4.1 percent weekly gain, the most since March. Nine of 10 industry groups advanced Friday, with raw-material and health-care stocks rallying the most.

Here are some of the market moves that were standing out Friday:

  • The Ibovespa posted a third weekly advance after Finance Minister Henrique Meirelles said in a radio interview that he’s certain Brazil’s economy will grow next year
  • Turkey’s equity benchmark climbed 1.5 percent to a one-week high as deals buoyed Arcelik AS and Turkiye Garanti Bankasi AS
  • Indian stocks capped the best week since May on expectations that pay hikes for federal staff will increase demand
  • The Taiex Index rallied 0.8 percent to a three-month high after Taiwan’s central bank cut interest rates
  • Angolan Eurobonds tumbled after President Jose Eduardo dos Santos said the country is struggling to meet debt payments because of the crash in crude prices

Central bankers from major economies moved swiftly to contain the panic in financial markets after the June 23 referendum. Bank of England Governor Mark Carney signaled that U.K. rates could come down within months as the country looks for a new prime minister to negotiate its EU withdrawal. The European Central Bank may add to its stimulus, while the Bank of Japan is willing to inject more funds. Futures traders now project the Federal Reserve probably won’t to raise U.S. interest rates before January 2018.

“The Brexit risk has been absorbed in emerging markets,” said Luca Paolini, chief strategist at Pictet Asset Management in London. “I don’t think it will have a massive impact on anybody else other than the U.K. Unless we see a big risk of economic contagion, the probability of which is quite low, we are pretty much back to the pre-Brexit situation.”

Emerging-market stocks, which lost $407 billion on the day following the referendum on concern that Britain’s exit from the EU will undermine trade and investment flows, now trade at an average 12.1 times projected earnings, the highest valuation since June 10. Paolini said he expects them to outperform developed-market equities this year and favors South Korea in the short-term and India and Indonesia in the long term.

Brazil, Turkey

The Ibovespa rose 1.4 percent in Sao Paulo, pushing the weekly advance to 4.2 percent. Meirelles said in an interview with Radio Estadao that if Acting President Michel Temer’s economic measures are quickly approved in Congress, the nation’s return to growth will be fast.

The Borsa Istanbul 100 Index posted a 3.4 percent gain this week. Arcelik rallied 7 percent Friday after signing a deal to buy Pakistan-based Dawlance group companies for $258 million. Garanti added 1.5 percent after saying it obtained a $300 million loan from the Export-Import Bank of China.

The Philippine Composite Index closed at its highest level since May 2015. SM Investments Corp. gained 2.4 percent Friday as investors bet that the country will speed up its infrastructure projects after President Rodrigo Duterte officially took office on Thursday.

The S&P BSE Sensex gained 0.5 percent. Indian state-controlled fuel retailers Bharat Petroleum Corp. and Indian Oil Corp. jumped to records on optimism the $13 billion pay increase for federal staff will boost demand for cars.

Currencies

The Brazilian real and South African rand led weekly gains in developing nation currencies this week, each strengthening more than 3.5 percent against the dollar. Russia’s ruble gained 2.3 percent as Brent crude sold for more than $50 a barrel in London.

China’s yuan posted a fourth weekly decline amid speculation the authorities are allowing the currency to weaken in the wake of Brexit, which is clouding the outlook for the world’s second-biggest economy. An official gauge of manufacturing for June came in at 50, the dividing line between expansion and contraction, compared with the previous month’s 50.1.

The MSCI Emerging Markets Currency Index gained 0.1 percent Friday, pushing its five-day gain to 1.3 percent.

Angola Eurobonds

Yields on Angola’s $1.5 billion of Eurobonds due in November 2025 increased 67 basis points to 10.4 percent. The president said at a meeting of the ruling MPLA party that revenues are “barely enough” to pay off debt owed by the government and Sonangol, the state oil company, according to a broadcast on state TV Friday.

China’s corporate bond sales tumbled the most in almost five years in the second quarter as defaults surged. That was the sharpest quarter-on-quarter decline since September 2011. Issuance is still more than twice the level of four years earlier.

The premium investors demand to own emerging-market debt over U.S. Treasuries fell three basis points to 384 basis points, narrowing for a fourth day to the lowest level since the day of the U.K. referendum.

according to JPMorgan Chase & Co. indexes.

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