One Big Reason Emerging Markets Aren't Getting Hit by Lower Oil Prices

Emerging markets have shrugged off recent declines in oil and other commodities in a display of resilience that suggests they are maturing.

MSCI’s emerging market stock index is closing in on a sixth straight month of gains, while its index of currencies is heading for a seventh after advancing every month since the end of November. On the other hand, oil is struggling to lift itself above $45 a barrel and the Bloomberg Commodity Index is heading for a fourth monthly drop. Underscoring the divergence, a measure of correlation between two benchmarks has been about half of what it was in 2009, according to data compiled by Bloomberg.

“I found it really bizarre that up until this year, and even a few months ago, so much sentiment was built in to what was happening with oil,” James Audiss, a Sydney-based senior wealth manager at Shaw and Partners Ltd., which manages about $9 billion, said in a phone interview Thursday. “That oil was doing well, equities were going up, that’s counter-intuitive.”

Lower crude prices should equal lower costs for manufacturers, resulting in improved earnings results. The fact that this relationship is only now starting to be reflected in the price moves of emerging-market stocks suggests this latest trend is “a return to normality” not seen since the 2008 financial crisis, he said.

This resistance may be a result of the growing influence of the technology sector, which has shown strong gains this year and reflects the maturing make-up of emerging market economies. The MSCI Asia Pacific Information Technology Index has climbed more than 5 percent this month, building on an advance of 26 percent from January through May.

The MSCI gauge for stocks in developing nations fell 0.3 percent as of 1:15 p.m. in New York Thursday.

Samsung Boost

Shaw and Partners’s Audiss sees further upside in Samsung Electronics Co., which is the largest weighting in both the MSCI Emerging Markets index and South Korea’s benchmark Kospi Index. The Korean electronics giant is up 33 percent this year, trading near a record high, yet still appears undervalued according to forward growth metrics, he said.

“What kind of impact would it have for a 40 percent increase in the value of Samsung given that higher level weighting in the Kospi? That’s going to drag up your emerging market indices as well,” he said.

Goldman Sachs Group Inc. is still “strategically positive” on developing markets and there are opportunities for investors to earn good carry, analyst Caesar Maasry wrote. In another note this week, Societe Generale SA said real yields in emerging markets are attractive and external balances are better than any point in the last five years.

— With assistance by Ben Bartenstein