Emerging market stocks pare losses after descent into bear market
China’s CSI 300 index of mainland listed companies opened nearly 2 per cent lower, following disappointing data released on Wednesday on China’s manufacturing sector and ahead of potential new trade tariffs imposed by the US, before paring losses later in the day.
Indonesia’s stock market also came under pressure as overseas investors have withdrawn some $3.7bn from the market so far this year, according to data from Bloomberg, pushing the Jakarta Stock Exchange Composite index down 10 per cent year-to-date.
In Japan, the Topix index opened the day 0.7 per cent lower, amid news of an earthquake with a 6.7 magnitude in the northern island of Hokkaido.
The Indonesian rupiah rebounded in the morning by as much as 0.42 per cent to Rp14,875 against the US dollar, and South Africa’s rand strengthened by 0.22 per cent to R15.3893 against the greenback.
The broader EM index has again slumped more than 20 per cent since its January high, the typical definition of a bear market. Analysts are now questioning whether the rout merely reflects a series of one-off hits or indicates the beginning of a broader malaise.
Fears of broader contagion from EM sell-off
“We’ve had a series of idiosyncratic shocks, but this week it has felt like more of a generalised sell-off than an idiosyncratic one,” said Gene Frieda, a strategist at Pimco in London. “Some investors just want to get out now.”
While homegrown problems in both Turkey and in Argentina have made them the weakest links across EM this year, there are signs that investors are now looking to reduce their broad exposure to currencies, stocks and bonds in the developing world.
The Turkish lira and Argentine peso enjoyed some welcome stability, helping JPMorgan’s index-tracking EM foreign exchange index to climb 0.3 per cent, but bourses in the developing world enjoyed little respite. The biggest fallers on Wednesday were Indonesian, Saudi Arabian, Nigerian and Hong Kong equities, even as Argentina and Turkey’s bourses bounced off their lows.
Amid fears of broader contagion from the sell-off, European shares retreated 0.9 per cent and the S&P 500 index dipped 0.3 per cent.
“People are now looking beyond idiosyncratic issues and more generally at spillover and contagion, and which economies are most vulnerable,” said Dwyfor Evans at State Street Global Markets.
Emerging markets embark on first big rate rise cycle since 2011
The rise in the US dollar since April has exacerbated troubles in several emerging economies, where the amount of dollar-denominated debt has more than doubled to $3.7tn over the past decade, according to the Bank for International Settlements.
Climbing US interest rates and the Federal Reserve slowly trimming its balance sheet of bonds acquired in the wake of the financial crisis has both supported the dollar and increased pressures on emerging markets, according to analysts.
Mark Tinker, a fund manager at Axa in Hong Kong, pointed out that the Libor interest rate — which constitutes the “raw material” of the financial system — has almost doubled in the past year. “What we are seeing in the markets at the moment are the natural consequences of tightening US monetary conditions,” he said.
At the same time, the trade tensions that threaten to slow the global economy are again in focus. A consultation period on US President Donald Trump’s proposal to impose US import tariffs on $200bn more of Chinese goods expires on Thursday.
Combined with a rising oil price — which helps energy exporters but hurts most developing countries — this could shave as much as 1.5 percentage points off EM economic growth this year, according to Goldman Sachs.
Emerging markets face further pressure before the all-clear
Although Asian markets have so far fared better than their EM peers, analysts caution that the region has its own problems. Strategists at Morgan Stanley said the stable renminbi had bolstered Asia over the past month, but added that “risks are building” in Asian currency markets.
They said a pick-up in trade tensions would “not help these markets either”, but pointed out that the impact could be mitigated to some degree if the People’s Bank of China managed to keep the renminbi in check.
“The momentum right now is quite strong, so you don’t want to stand in front of it,” said Tai Hui, chief market strategist for Asia-Pacific at JPMorgan Asset Management.