Commodities Fuel Rebound in Emerging Markets
Commodity-related investments have bounced back this week following a brutal selloff, the latest reminder of the volatility and sentiment swings common in emerging markets.
The U.S. crude-oil price has risen 12% to around $50 a barrel, while the MSCI Emerging Markets stock index has rallied to its highest level in two months. Shares of miner and trader Glencore PLC rose 36%, recovering ground lost early last week when the market swooned amid rumors that the company faced financing difficulties.
Behind the recovery: the prospect of a longer period of ultralow interest rates in the U.S., which has eased fears that a renewed period of dollar appreciation would intensify strains in developing economies such as Brazil, Turkey, South Africa and others. Meanwhile, China has had a market holiday for the past week, temporarily eliminating daily market reports that had become a source of anxiety for many traders.
“It’s clearly been a risk-on moment after what’s been a pretty prolonged selloff,” said Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management, which oversees £307 billion in assets.
The Turkish lira and the South African rand, two of the most sensitive assets to a change in U.S. monetary policy, gained about 3% against the dollar this week as expectations that the Federal Reserve will keep rates anchored at ultralow levels for longer is pushing investors to seek yield in riskier assets.
A gauge of the energy sector on Australia’s S&P/ASX 200 benchmark rocketed 15% this week, the sharpest weekly percentage gain in at least two decades. As recently as Sept. 29, it had fallen to its lowest point in 10 years.
Currencies of commodities-exporting countries also rose sharply. Indonesia’s rupiah logged its biggest one-day rise against the U.S. dollar in seven years on Wednesday and is at its strongest level since June. The Malaysian ringgit is at its strongest level since late August. The gains mark a turnaround from the depths of the summer, when both currencies consistently plumbed their weakest levels in nearly two decades.
“This week has been a classic rally for emerging-market currencies,” said Piotr Matys, emerging-market strategist at Rabobank.
Meanwhile, emerging-market companies and governments have taken advantage of increased investor risk appetite to issue new debt this week.
Some emerging-market countries which have been suffering severe outflows in recent weeks saw the trend reversed in the week to Oct. 7, according to data analysis by Renaissance Capital. South African funds had inflows of 1.9% of total assets, while Turkish funds had inflows of 0.7% of assets.
Metals miner Norilsk Nickel broke a nine-month absence for Russian companies from U.S. dollar bond markets when it issued $1 billion at an interest rate of 6.625%. It was followed by a €1 billion three-year bond from Russian energy giant Gazprom, as well as deals from Ghana and Turkcell Iletisim Hizmetleri AS, Turkey’s biggest mobile-phone operator.
Sailesh Lad, emerging-market portfolio manager at AXA Investment Managers, who bought the bond from Gazprom this week, is keeping exposure to emerging markets. He is particularly positive on India, Russia and Mexico.
Patrick Zweifel, chief economist at Pictet Asset Management, said he recently recommended investors increase exposure to emerging markets, having previously advised a light position relative to benchmark indexes.
“Valuations look extremely attractive in emerging markets. They’ve suffered so much,” he said. Mr. Zweifel said that emerging-market currencies are undervalued by 24% versus the U.S. dollar based on his own models that take into account a range of economic factors—the most extreme level since the mid-1980s.
But many analysts and traders warn that the gains could be short-lived. They say many of the trends that drove down commodity prices and hammered emerging-markets indexes remain in place.
China’s pace of growth is widely understood to have slowed substantially from the double-digit rates common only a few years ago, and its consumption of materials from cotton to iron ore to cement has accordingly declined. That retreat is continuing to send ripples through markets and nations that grew robustly over the past decade shipping their goods to the world’s most populous nation.
And while slower Chinese growth is now many analysts’ baseline scenario, some investors remain anxious, in part because there is a perception that China’s economic data is unreliable.
“Things might be stabilizing, but it doesn’t mean we’re off to the races. Whether it goes further—a lot of that is China dependent,” he said.
Investors have pulled $63 billion out of emerging-market equities funds this year, according to Bank of America Merrill Lynch, amounting to 7.4% of assets under management. Investors have pulled money out of emerging-market debt funds for 11 straight weeks, according to BAML, taking net outflows to $16 billion, almost 6% of total assets so far this year.
The MSCI Emerging Markets index is down 11% this year. In Europe, shares in basic resources companies have sunk almost 12%. Local-currency emerging-market debt has had negative total return of more than 8% so far this year, according to Barclays.
“The recovery runs the risk of showing signs of fatigue,” said Matthew Sherwood, investment strategist at Perpetual Investment Ltd. Fears about China’s slowdown may have eased, but there are few “material factors” that support this week’s momentum.