Emerging Stocks Rise as Growth Optimism Outweighs Political Risk

  • Equities selling at highest valuations since May 2014
  • Lira drops to record low as S&P cuts Turkey’s credit rating

Turkey Volatility: More Downside for Markets?

Emerging-market stocks rose for the ninth time in 10 days, pushing valuations to the highest level in 14 months, as growing confidence that the world economy is improving outweighed a rising tide of political risks. The lira fell to a record low as S&P Global Ratings cut Turkey’s credit rating.

The MSCI Emerging Markets Index rose 0.3 percent to 870.76. The gauge trades at 12.3 times the projected earnings of its members, above the 10-year average multiple of 11.2. Stock gauges in Hungary and Poland each gained 0.6 percent. A measure of developing-nation exchange rates rose, ending a three-day decline, as gains in China’s yuan and the Philippine peso outweighed the Lira’s slump.

Emerging-market stocks are gaining as expectations that the Federal Reserve will refrain from raising interest rates this year, and better-than-estimated economic data from the U.S., stoke risk appetite. The optimism for continued central-bank stimulus around the world helped equities post the best first-half performance since 2009 relative to advanced-nation shares after three years of underperformance. A gauge of expected volatility in developing-nation equities fell to the lowest level since July 2015.

“Emerging markets will continue to do well,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. “The relative risk profile of emerging versus developed markets has improved due to the Brexit uncertainties and emerging-market growth momentum is clearly improving now.”

Stocks

The MSCI emerging-market stock benchmark is showing a technical pattern that has been seen only four times since the 2008 financial crisis and led to rallies on two of those occasions. The index has made a signal-line crossover on its monthly moving average convergence-divergence chart. A similar move in July 2009 heralded a 47 percent jump and in April 2014, it was followed by a 10 percent gain.

The Borsa Istanbul 100 index fell 1.7 percent as investors dumped Turkish assets following President Recep Tayyip Erdogan’s move to deepen a purge of those associated with the last week’s failed coup.

U.S. exchange-traded funds that invest in the emerging markets received a net $957 million of capital inflows on July 19, capping a net $3.6 billion gain in the past five days, according to data compiled by Bloomberg. Investors have put a net $14.3 billion into the funds in 2016.

Currencies

The lira slumped 1.5 percent to 3.0898 per dollar. The currency tumbled after S&P Global Ratings downgraded the country’s credit rating to BB, two steps below investment grade, from BB+ and assigned a negative outlook, saying the move reflected the further fragmentation of the political landscape after last week’s attempted coup.

The MSCI Emerging Markets Currency rose 0.1 percent. The ruble fell 0.4 percent. Russia’s currency is the best performer worldwide this year after Brazil’s real with an advance of 15 percent. The gains are putting a strain on the budget by shrinking the value of a barrel of oil in local-currency terms and depriving the government of revenue as it runs the widest deficit since 2010.

The ruble remains the “currency of choice” for carry trade rather than the real, Goldman Sachs said in a note to clients.

Bonds

The yuan jumped 0.3 percent to 6.6778 per dollar amid speculation China’s central bank is trying to prevent the currency from weakening beyond 6.70, a threshold that was breached this week for the first time since 2010. The People’s Bank of China raised its daily reference rate for its currency on Wednesday, even after the greenback strengthened overnight. The Philippine peso gained 0.5 percent.

The real slipped 0.3 percent as volatility dropped to the lowest level in a year as Brazil’s central bank acts to limit gains in the currency amid speculation that a new government will pull the nation from its deepest recession in a century.

In Turkey, Erdogan’s move against the professional accreditation of around 60,000 people following the coup highlighted the growing political risks of investing in the country. Investors sent up the cost of hedging against a default by the government in Ankara in the next five years near the levels of junk-rated countries.

JPMorgan Chase & Co. said $7.2 billion of sovereign bonds and $1.5 billion of corporate debt are at risk of forced selling if Turkey loses investment-grade status from Moody’s Investors Service, which says it is reviewing the country’s debt for a downgrade. The yield on the country’s local five-year bonds increased for a fourth day, rising 17 basis points to 9.94 percent.

The premium investors demand to own emerging-market debt over U.S.Treasuries narrowed four basis points to 353, according to JPMorgan Chase & Co. indexes.

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