Bear market looms for emerging stocks as trade noise gets louder

Emerging-market stocks were on the cusp of a bear market for a second day, with few signs of relief from a sell-off that’s battered developing economies around the world.

Currencies were mixed as the rand recovered from a three-day slide.

The MSCI Emerging Market Index of equities retreated for a seventh day, bringing its drop since a peak in January to almost 20%.

Stocks in the Philippines were the biggest decliners across the developing world after inflation exceeded 6% for the first time since 2009. An index of currencies reversed losses as a drop in the dollar brought some relief, as did a gain in copper prices.

“It is mainly just the continuation of what’s been happening most of this week,” said Christopher Shiells, the London-based managing analyst for emerging markets at Informa Global Markets.

“We’ve got the US decision on the next tranches of Chinese imports hit by tariffs and the general feeling that this sort of under-performance of EM is going to continue for a couple of more months. There is still a lot of uncertainty hanging around emerging markets at the moment.”

While some traders may be staying on the sidelines ahead of the key US jobs report on Friday, most see more pain for developing nations, particularly if President Donald Trump’s administration follows through on a plan to levy $200bn of additional tariffs on Chinese imports after a consultation period ends on Thursday. China has threatened to retaliate.

 “The very tough conditions for emerging markets are likely to continue for a while and economies with current-account deficits will probably remain a major target of sell-offs,” said Takashi Kudo, the head of financial markets research at Fujitomi in Tokyo.

Short-term stabilisation

“Emerging currencies are seeing some stabilisation in the very short term amid a series of supports from respective monetary authorities,” including intervention and rate increases, he said.

Here’s what some investors and analysts have to say about emerging markets:

George Boubouras , a director at Salter Brothers Asset Management in Melbourne

Contagion is a normal reaction. This is a dollar-strength issue that began at the beginning of the year or late last year and good emerging markets have been impacted because they are generally more liquid. 

When the sentiment weighs so negatively and the contagion, which will get worse, continues, people then start going back and looking at the fundamentals across reasonable economies that have current-account imbalances. The valuations are very compelling versus developed markets. 

Investors can start entering now, but it’s just not going to repair itself anytime soon. From Salter’s perspective it’s too early, but for a deep-value investor it’s compelling.

Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore

Economies with twin deficits, low foreign-exchange reserves and high inflation are very vulnerable. But, the silver lining is that so far, the sell-offs outside Turkey and Argentina are quite consistent with those during the global financial crisis and the taper tantrum, and not deeper like during the Asian financial crisis. 

In Asia, the twin deficit issue is acute for Indonesia and especially India amid persistently high oil prices. Indian policy makers aren’t leaning against depreciation in the currency at this point.

Jameel Ahmad, global head of currency strategy and market research at FXTM

Investors are really attacking currencies from current-account deficit countries.

“What I’m looking for is a change in tone in the Federal Reserve as we end 2018. That potentially they will pause monetary policy normalisation headed into next year. This will provide a significant opportunity for a rebound in FX in emerging markets.”

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