The Malaysian Reserve

Bear market looms for emerging stocks

Figures are shown outside an LED stock board outside the Philippine Stock Exchange (PSE) building in Bonifacio Global City (BGC), Taguig City, Philippines. Photographer: Carlo Gabuco/Bloomberg

By BLOOMBERG

BANGKOK • Emerging-market (EM) stocks were on the cusp of a bear market for a second day yesterday, 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 EM 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 EMs 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 underperformance of EMs is going to continue for a couple of more months. There is still a lot of uncertainty hanging around EMs at the moment.”

While some traders may be staying on the sidelines ahead of the key US jobs report today, most see more pain for developing nations, particularly if US President Donald Trump’s administration follows through on a plan to levy US$200 billion (RM830 billion) of additional tariffs on Chinese imports after a consultation period ended yesterday. China has threatened to retaliate.

“The very tough conditions for EMs 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 Co in Tokyo.

“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.

Meanwhile, Vishnu Varathan — head of economics and strategy at Mizuho Bank in Singapore — said economies with twin deficits, low foreign- exchange (forex) 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,” he said.

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

On another note, ForexTime Ltd global head of currency strategy and market research Jameel Ahmad said investors are really attacking currencies from current-account deficit countries.

“What I’m looking for is a change in tone in the US 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 forex in EMs.”