Surprise index signals emerging stock rally may have more legs

The rally in emerging-market stocks from their sell-off in March may have more room if an indicator of economic momentum is any guide.

The economic surprise index for developing nations compiled by Citigroup jumped to a two-year high on Monday as global production started to gather pace again due to the rolling back of coronavirus lockdowns.

The Citigroup gauge — which measures whether recent data have surpassed or fallen short of economists’ forecasts — climbed to 28.5, from as low as minus 41.2 on March 16.

The surprise index has tended to be a leading indicator for the performance of developing-nation equities, as the MSCI Emerging Markets Index of stocks reached its own low point just three days later. The equity gauge has now risen more than 27% from that level.

Purchasing managers’ indexes across emerging markets released on Monday showed an improvement in factory activities.

May readings for China, Brazil, India and Russia all exceeded the levels from April, though most except for China remained below 50, the dividing line between expansion and contraction.

“Industrial production continues to recover fast supported by government action but the demand side is recovering more slowly as important regions emerge from containment/lockdown,” said Rob Mumford, a money manager for emerging-market equities at GAM Investments

MSCI EMERGING MARKETS INDEX

in Hong Kong. “Nonetheless, an improving trend is encouraging.”

There are plenty of potential pitfalls in the way of further stock gains. USChina tensions have been escalating again, with the Asian country said to tell state-run agricultural companies to halt purchases of some US farm imports, while there remains the risk that a second wave of the virus may break out as lockdowns are relaxed.