Emerging market equities fell half a per cent yesterday and looked set for a second straight week of losses, though tentative gains on European bourses lifted emerging market dollar bond prices and currencies off the previous day’s lows.
Emerging markets are taking their cue from developed peers, which are gripped by fears of a prolonged period of zero or negative interest rates, as economies fail to recover. That could take a heavy toll on banks, whose shares have already tanked this year by up to 40%.
HSBC strategist Dominic Bunning said those fears coincide with slow growth and high inflation in many emerging markets, while political risk is rising in countries such as Poland. That outweighs any positive effect delivered by low Western interest rates, he said.
“Ultimately what you have to ask youself is, if G-10 (developed) rates are staying low, why is that happening? Is it because global growth is slower and policy makers are realising that they haven’t generated as sharp a recovery as they wanted, and they are to some degree running out of options?” he said.
“I would be leaning into that...camp, and that suggests a pretty challenging time for EM currencies.”
The MSCI emerging equity index added to Thursday’s 2.4% loss to be down almost 4% this week.
Asian markets were hit by losses in Japan, and by Hong Kong shares at 3-1/2 year lows. Equity outflows weighed on currencies, with India intervening to lift the rupee off 2-1/2 year lows.
But a stronger opening for Western European markets, along with a 5-percent oil price bounce lifted bourses in Russia, South Africa and Poland by 1% or more.
However, Bunning said there was a lack of conviction behind the moves, citing high volatility and low liquidity.
On currencies, the rouble tracked oil prices to rise 1% versus the dollar after trading at over 80 to the dollar on Thursday. The rand firmed 0.4%.
By contrast, Central Europe posted positive news with stronger-than-expected data, with Poland growth at 3.9% on an annual basis in the last 2015 quarter, Hungary by 3.2%, Bulgaria by 3% and Slovakia by 4.2%.
Capital Economics said the data suggested regional growth of almost 4%, the most since 2008, thanks to domestic consumption.
“These serve as a timely reminder that not all parts of the emerging world are shrouded in gloom,” the firm told clients.
“Households have benefited from the windfall from lower oil prices, improving labour market conditions and more accommodative monetary and fiscal policy.”
The forint was the only regional currency to register substantial gains, rising 0.4%.
Emerging sovereign dollar bond yield spreads over Treasuries meanwhile tightened 7 basis points, off 6-1/2 year highs hit on Thursday and led by bonds of oil exporters such as Russia and Angola.
Ukrainian bonds rose half a cent across the curve, adding to gains after a promise of reforms by the president and news Kiev had agreed to restructure debt owed to Russia’s Sberbank with a 25-percent principal write-down.