Emerging Stocks Rebound as Growth Outlook Offsets Fed Concern

Updated on
  • Signs of global trade improving good for developing assets: NN
  • Odds of U.S. interest rate move this year have risen to 59%

Saravelos: Brazil's Real Rallies on Fed Dis-Belief

Emerging-market stocks resumed this month’s advance as the prospect of a stronger U.S. economy helping to boost growth in the developing world offset concern that higher Federal Reserve interest rates will reduce demand for riskier assets.

The MSCI Emerging Markets Index gained 0.3 percent, pushing its advance in August to 2.9 percent. The equity benchmark is headed for its third monthly gain in a row after data yesterday showed U.S. consumer spending rose for a fourth month in July, giving the biggest part of the economy a solid start to the third quarter.

Emerging-market investors are growing more comfortable with the idea of a U.S. interest-rate increase this year as Fed officials including Chair Janet Yellen say the case for higher borrowing costs is getting stronger. While an increase may curb the flow of money into riskier assets, tighter policy reflects robust U.S. growth, boosting the outlook for developing-nation companies trading with the world’s biggest economy.

“The Fed, when it resumes hiking, will be hiking for good reasons,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who recommends buying equities in India and Indonesia. “Global trade has been weak for years and that might pick up somewhat, helped by the U.S. Emerging markets normally perform well in such an environment.”

Fed Odds

The MSCI Emerging Markets Currency Index declined less than 0.1 percent as exchange rates in Russia, Colombia and other oil-exporting nations fell with crude prices, offsetting gains in Asian currencies including the South Korean won on and Indian rupee. The premium investors demand to hold emerging-market bonds versus Treasuries increased one basis point to 334, near the lowest level in more than a year, according to JPMorgan Chase & Co. indexes.

Traders see a 59 percent chance of a Fed increase by year-end, up from 37 percent odds four weeks ago, data compiled by Bloomberg show. Fed Vice Chairman Stanley Fischer said in a Bloomberg Television interview on Tuesday that monetary policy involves more than a single rate decision.

“The work of the central bank is never done, and I don’t think you can say one and done and that’s it,” he said.

Six of the 10 industry groups in the emerging-market equity benchmark advanced, led by technology and health care companies. Poland’s equity gauge jumped 1.2 percent, the most since Aug. 4. Turkey’s markets were closed for a national holiday.

Brazil, China

The Ibovespa slipped 0.1 percent in Sao Paulo as optimism that Petroleo Brasileiro SA’s turnaround plan is working was upstaged by suspended Brazilian President Dilma Rousseff’s impeachment trial. The state-controlled oil company gained 1.7 percent, while for-profit education company Kroton Educacional SA slid 3.7 percent, contributing the most to the benchmark index’s decline.

The Hang Seng China Enterprises Index added 1.1 percent. Tencent Holdings Ltd. climbed 1.7 percent, the biggest jump since Aug. 18.

The won advanced 0.5 percent, while the Taiwanese dollar and Indian rupee each added 0.2 percent.

“The market expects that even if the Fed were to hike in September, it would be a dovish hike in as much as it could be followed by a prolonged delay before another,” said Koon Chow, a London-based strategist at Union Bancaire Privee.

South Africa Outlook

The Colombian peso and Russian ruble each declined 0.8 percent. Oil, Russia’s biggest export, slipped 1.8 percent to $48.37 a barrel in London.

The rand weakened 0.9 percent. South Africa’s credit rating would be cut and the currency would “buckle” if Finance Minister Pravin Gordhan is removed from his post, according to Goldman Sachs Group Inc. The currency’s decline accelerated Aug. 23 after a news website reported that the police had summoned Gordhan in connection with an investigation into alleged irregularities at the tax-collection authority, which he headed from 1998 to 2009.

South African local-currency bonds climbed, with the yield on five-year notes dropping three basis points to 8.4 percent. The rate on similar-maturity Polish debt increased five basis points to 2.16 percent.