Emerging Markets Rally as Fed Signals Slower Rate Moves in 2017

Updated on
  • Equity benchmark set for monthly gain as risk demand returns
  • Ruble strengthens as Brent crude rises toward $47 a barrel

Emerging-market stocks and currencies rose for a third day as the Federal Reserve kept U.S. interest rates unchanged and indicated that the pace of tightening next year will be slower than previously projected.

The MSCI Emerging Markets Index advanced 0.8 percent to 905.65. The rally gained momentum following the Fed statement, which came after Japanese policy makers shifted the focus of their stimulus away from expanding the supply of money to controlling the shape of yields across different maturities. Developing-nation assets have been bolstered this year by global central bank policies supportive of demand for riskier investments.

“This is obviously a continuation of the liquidity cycle for emerging markets,” Jorge Mariscal, the New-York based chief investment officer for emerging markets at the wealth management unit of UBS Group AG, said by phone. The unit is overweight U.S. and emerging-market equities. “It means we have a few more months of low-cost of capital, and liquidity flowing into emerging-market bonds and equities.”

Raw-material and technology companies rose the most among the 11 industry groups in the developing-nation stock measure Wednesday. Chinese and Thai equities led the advance in developing Asia. South Africa’s rand appreciated 2.6 percent, the best performance in the world, on speculation Anheuser-Busch InBev is buying the currency to pay for its $104 billion acquisition of SABMiller Plc. The ruble strengthened and Russian sovereign bonds advanced as Brent crude rose toward $47 a barrel.

Price swings in developing-nation assets have widened this month as traders awaited clues about the path of central banks’ stimulus. The future trajectory for emerging markets depends largely on when the Fed will raise interest rates again. The J.P. Morgan Emerging Market Volatility Index touched 10.88 last week, the highest level since the period that followed Britain’s vote to leave the European Union.

“The market is short-term and schizophrenic,” Robert Marshall Lee, the London-based head portfolio manager of emerging-market and Asian equities at Newton Investment Management, said by phone. He manages $4.2 billion and has invested in Chinese Internet companies and health care stocks in developing nations. “There is still plenty of bid in emerging markets, plenty of big spreads and quite high-quality companies.”

While exchange-traded funds that buy emerging-market stocks and bonds have posted 16 weeks of inflows, the pace slowed to a three-month low last week as concern that global central banks will be less committed to stimulus contributed to the biggest equity selloff since May. Stocks have since recouped losses for September and are on course for a fourth straight monthly advance.

Fed Outlook

The Fed left its policy interest rate unchanged while projecting that an increase is still likely by year-end. At the same time, the central bank’s so-called “dot plot”, which it uses to signal its outlook for borrowing costs, showed that policy makers see two moves next year, down from their projection of three in June.

The MSCI Emerging Markets Index has risen 14 percent this year and trades at 12.5 times the projected 12-month earnings of its member stocks. That compares with a multiple of 16 for the MSCI World Index, which has gained 3.5 percent in 2016.

Commodity producers including Vale SA helped drive a 1.1 percent gain in the Ibovespa. The iron-ore exporter rallied 6.3 percent, contributing the most to the Brazilian equity benchmark’s advance.

China, Turkey

The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong gained 1 percent, while the SET Index added 0.9 percent in Bangkok.

Turkey’s Borsa Istanbul 100 Index climbed 0.8 percent to a two-week high after Alastair Wilson, Moody’s managing director of Global Sovereign Risk, told Reuters in an interview that the shock to the country’s economy from the attempted coup in July had largely dissipated.

The MSCI Emerging Markets Currency Index rose 0.1 percent as the rand strengthened for a sixth day. Inflows from the SABMiller purchase may amount to as much as 100 billion rand ($7.3 billion), John Cairns, a currency strategist at Johannesburg-based Rand Merchant Bank, said in an e-mailed note.

The ruble strengthened 1.5 percent. Brent crude, the oil grade traders use to price Russia’s main export blend, rallied 2.1 percent to $46.83 a barrel. Oil was buoyed as weekly industry data showed U.S. crude inventories declined to the lowest level since February.

Russian 10-year government notes rose, pushing the yield down 14 basis points to 8.16 percent. The rate had climbed in the past three days after the central bank said on Friday it wouldn’t reduce benchmark borrowing costs again this year.

The premium investors demand to own emerging-market debt over U.S. Treasuries narrowed four basis points to 336, according to JPMorgan Chase & Co. indexes.