Little appetite for EM equities

Up tick in US Treasury yields

ENCOURAGING factory growth data from markets such as Turkey and China failed to lift emerging equities yesterday as a more hawkish Federal Reserve fuelled an up tick in US Treasury yields, dampening investor appetite.

MSCI’s benchmark emerging stocks index fell 0.2 percent, as a strong performance in emerging Europe failed to offset earlier weakness in the Asian session.

The Fed upgraded its inflation outlook and flagged further policy tightening this year at its meeting ending on Wednesday, citing solid gains in employment, household spending and capital investment.

US 10-year Treasury yields briefly shot up to 2.754 percent, a level last seen in April 2014, casting a pall over emerging markets and dispelling some of the rosy picture from manufacturing activity data.

US interest rate futures are now almost fully pricing in three rate hikes this year, compared to two at the start of the year, while some see a possibility of four rate rises.

“Now that the Fed is signalling faster hikes we could have temporary dollar strength and EM weakness, but the fundamentals are the same,” said Per Hammarlund, chief emerging markets strategist at SEB. “This is just a temporary correction, rather than a fundamental shift in sentiment.”

Foreign investors poured $30 billion (R356.55bn) into emerging markets in January, a seven-month high and the best start to a year since 2015, according to the Institute of International Finance data.

In emerging Europe, Turkish stocks rose 1 percent after Turkey’s factory activity grew at the fastest rate in almost seven years in January.

Other big gainers included Russia, up 0.9 percent after manufacturing activity hit a six-month high, and Poland up 0.7 percent, as new factory orders expanded at their fastest in three years.

Asian bourses struggled, with Chinese mainland shares down almost 1 percent. Yet China’s manufacturing growth remained elevated in January, suggesting some resilience.

“The world economy and China in particular have started the year on a relatively firm footing and that’s good news for emerging stocks and assets,” said Hammarlund.

In India, stocks initially fell more than 1 percent after the announcement of a long-term capital gains tax on equities. The market later steadied to trade flat. The government also unveiled a budget allocating billions of dollars for rural infrastructure and a health insurance programme.

South Africa’s rand was the other main currency underperformer, down 0.2 percent. President Jacob Zuma has asked prosecutors to drop corruption charges, responding as pressure mounts for him to step down.

The Czech crown was steady against the euro ahead of a central bank meeting at which it was expected to raise rates by 25 basis points to 0.75 percent. – Reuters