Emerging stocks slide into bear market amid contagion concern

By Lilian Karunungan, Selcuk Gokoluk, Srinivasan Sivabalan and Ben Bartenstein

Emerging-market stocks fell into a bear market as fear of contagion spread throughout the developing world.

The MSCI Emerging Market Index of equities extended its losses from a January peak to 20 percent, the threshold that marks a bear market, while cu rrencies were mixed after a three-day slump. Argentina’s peso led global gains as Treasury Minister Nicolas Dujovne held talks in Washington with the International Monetary Fund. The Russian ruble plummeted to its weakest in more than two years after Prime Minister Dmitry Medvedev said rates were high.

“There is still a lot of uncertainty hanging around emerging markets,” said Christopher Shiells, a London-based managing analyst for emerging markets at Informa Global Markets. “We’ve got the U.S. decision on the next tranches of Chinese imports hit by tariffs and the general feeling that this sort of underperformance of EM is going to continue for a couple of more months.”

While some traders may be staying on the sidelines ahead of the key U.S. jobs report Friday, others see more pain for developing nations, particularly if Donald Trump’s administration follows through on a plan for levies on $200 billion of additional Chinese imports after a consultation period ends 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 selloffs,” said Takashi Kudo, the head of financial markets research at Fujitomi Co. in Tokyo. “Emerging currencies are seeing some stabilization in the very short term amid a series of supports from respective monetary authorities,” including intervention and rate increases, he said.

U.S. companies hired fewer workers in August than economists estimated, a private report showed Thursday. The ADP figures, published before tomorrow’s official non-farm payrolls report, showed 163,000 new jobs compared with expectations for 200,000. If weaker U.S. employment gains cloud the outlook for Federal Reserve rate increases, demand for riskier assets such as emerging markets may rise.

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

George Boubouras , a director at Salter Brothers Asset Management Ltd. 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
Jameel Ahmad, global head of currency strategy and market research at FXTM