Expect more short-term pain, investors said, after emerging-market stocks tipped into a bear market. The MSCI Emerging Market Index closed down 0.3 percent in New York on Thursday.
Expect more short-term pain, investors said, after emerging-market stocks tipped into a bear market. The MSCI Emerging Market Index closed down 0.3 percent in New York on Thursday. That took its decline from a Jan. 26 high to just over 20 percent, the threshold for a bear market. The measure rose 0.1 percent as of 1:15 p.m. in Hong Kong on Friday.
Emerging-market assets are under pressure from a stronger dollar and rising U.S. interest rates, as well as American protectionism. Contagion concern has come to the fore in recent weeks as the most vulnerable developing economies — Argentina and Turkey — fell into crises. Shares are likely to drop a further 10 percent from here, said Nader Naeimi, the head of dynamic markets at AMP Capital Investors Ltd. in Sydney.
“Another leg lower, and we will have massive buying opportunities,” he said. While Asian economies have sounder fundamentals, the region makes up about three-quarters of the emerging stocks gauge and has suffered by association. An index of developing-nation Asian stocks is down 3.6 percent this week, and is trading near the lowest in more than a year.
The focus of the emerging-market sell-off has shifted to stocks this week. The MSCI Emerging Markets Currency Index rose 0.2 percent on Friday, paring its loss so far this week to 0.6 percent. This year’s reversal in emerging stocks comes after an upswing that started in January 2016 and lasted for around two years. Losses have intensified over the past week and a half amid contagion concern and as investors wait to see if the U.S. will go ahead with a plan to impose tariffs on an additional $200 billion of Chinese imports. A public consultation period on the proposal ended on Thursday.
The impact of any worsening in the trade war on the Chinese economy will be crucial for the outlook for developing-nation stocks. The Asian giant contributes more than 30 percent of global growth and is the biggest trading partner for many emerging markets.
There’s likely to be a China rebound in the fourth quarter as it often takes three months for fiscal and monetary easing to feed through to the real economy, said Ben Luk, a global macro strategist at State Street Global Markets in Hong Kong. This view “remains core to why we have not downgraded emerging markets to a negative bias,” he said. Still, “we believe it’s too early to tap back into EM stocks as the negative sentiment on politics and trade will continue to dominate short-term performance.”
The MSCI Emerging Market Index has fallen to trade on a 12-month forward price-to-earnings ratio of 11 times. That’s the lowest since March 2016 and compares with a high of over 13 times at the market peak in January.
Investors who are able to ride out more volatility in the near term should eventually be rewarded with a rebound, said Suresh Tantia, an investment strategist at Credit Suisse Group AG in Singapore.
“Emerging-market equities are handcuffed by trade uncertainty and concerns around contagion risk at this point of time,” he said. “We believe they offer tremendous value as the growth outlook for EM remains healthy and valuations have become very attractive.”
Here’s what some other traders and strategists had to say:
Stephen Innes, head of trading for Asia Pacific at Oanda Corp. in Singapore
“There’s a growing sense that even if this tariff deal gets molded in some form or another, free trade as we once knew it will never be the same” “I’m watching the Shanghai Futures Exchange as that is providing a good read on local expectations for commodity prices and the current carnage does suggest those markets are also looking at a softer economic outlook in China” “I remain a seller on rallies in this environment until the market momentum proves me otherwise”
Jingyi Pan, a market strategist at IG Asia Pte. in Singapore
The drag for most emerging-market stocks had been a result of the jitters brought about by worries of contagion and risks of further trade frictions surrounding the U.S. Not to mention, the Fed’s tightening path keeps the pressure on and confidence low for regional markets “Investors may find little reason at present to pick up EM stocks. But going into the end of the year, there would likely be more clarity and one would not be surprised to see the market just waiting out this bout of uncertainty”
Ben Luk at State Street
We retain a neutral bias on emerging markets and they’re at a crossroads in terms of more attractive valuation and much lower positioning after the abrupt sell-off. But the headwinds remain in terms of the continued dollar rally, while the earnings outlook continues to disappoint relative to U.S. equities A likely Chinese rebound will have a positive spillover effect to the rest of EM Asia. “But we will look to be more constructive once the dollar rally stalls as well as a turnaround in earnings expectations”