Emerging-Market Assets Drop as Turkey Highlights Political Risk

  • Stocks in Istanbul fall most in world after Moody’s downgrade
  • Philippine peso declines to seven-year low on Duterte concerns

Lira Falls After Turkey Credit Downgrade

Emerging-market assets fell for a second day, led by a plunge in Turkish stocks after Moody’s Investors Service cut the country’s credit rating to junk, underscoring political risks in developing nations.

Turkish equities fell the most in the world and yields on the nation’s 10-year bonds surged as the Moody’s downgrade came after the ratings company concluded a review initiated after an unsuccessful coup attempt in July. The Philippine peso weakened to a seven-year low amid concern about President Rodrigo Duterte’s policies. Saudi Arabian stocks rose the most in three weeks as oil prices recovered amid signs the kingdom will offer production cuts when OPEC members and Russia meet Wednesday in Algiers.

The MSCI Emerging Markets Index dropped 1.3 percent to 905.49. The decline reduced the benchmark’s rally since the end of June to 8.6 percent. It posted a 3.6 percent rally last week, the most since mid-July, as pledges from global central banks to sustain stimulus rekindled demand for riskier assets in developing nations.

“We are starting to see some profit-taking,” said Regis Chatellier, a strategist at Societe Generale SA, who favors Argentinian and Colombian sovereign bonds. “It still makes sense to be long” developing-nation sovereign bonds and currencies “because the carry is attractive.”

Inflows to U.S.-listed emerging market exchange-traded funds that invest across developing nations as well as those that target specific countries totaled $746.3 million in the week ended Sept. 23, compared with $74.7 million in the previous period, according to data compiled by Bloomberg. Fund assets have grown $22.6 billion so far this year.

Turkey

Moody’s had placed the rating on review for downgrade three days after a faction of Turkey’s military tried to overthrow President Recep Tayyip Erdogan’s government on July 15, while S&P Global Ratings downgraded the country immediately following the failed coup. A junk rating at Moody’s leaves Fitch Ratings as the only major company to maintain an investment grade for Turkey.

The yield on Turkey’s 10-year local currency bonds rose 29 basis points to 9.8 percent. The lira dropped 0.4 percent, extending its decline in the past two days to 1.3 percent. The Borsa Istanbul 100 Index sank 3.8 percent. Turkiye Halk Bankasi AS dropped 8 percent, the worst performance on the benchmark equity gauge.

Stocks

All 11 industry groups in the MSCI Emerging Markets Index declined, led by technology and industrial stocks.

Global funds sold Philippine stocks for a 22nd straight day amid nervousness about the fallout from Duterte’s anti-drug war and his outbursts against the U.S. and the United Nations. The country’s equity benchmark dropped 1.2 percent.

The Ibovespa declined 1.1 percent in Sao Paulo. Declines in financial stocks including a 1.2 percent drop in Banco Bradesco SA weighed on the Brazilian equity gauge.

Taiwanese stocks fell 1 percent, led by shares of suppliers of Apple Inc.’s iPhone 7. Apple slid on Friday amid speculation overall sales of its newest smartphone would be lower than last year. The Shanghai Composite Index lost 1.8 percent. The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong retreated 1.7 percent.

A measure of shares in the Gulf Cooperation Council countries including Saudi Arabia added 0.4 percent as Brent crude sold for more than $47 a barrel.

Currencies

The MSCI Emerging Markets Currency Index dropped 0.1 percent. The Philippine peso fell 0.6 percent to the lowest level against the dollar since September 2009. S&P warned last week of “rising uncertainties surrounding the stability, predictability, and accountability” of Duterte’s administration.

The Mexican peso fell 0.4 percent. Wagers against the Latin American nation’s currency have surged to a record as economists at Bank of America Corp. and Citigroup Inc. warn that Monday night’s U.S. presidential debate between Democrat Hillary Clinton and Republican Donald Trump may drive fresh losses.

The premium investors demand to hold emerging-market bonds over U.S. Treasuries increased nine basis points to 341, according to JPMorgan Chase & Co. indexes.

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