Bloomberg News

Most Emerging-Market Stocks Fall on U.S. Concern; Lira Rallies

July 27, 2011

July 27 (Bloomberg) -- Most emerging-market stocks fell as concern that the U.S. may lose its top credit rating overshadowed signs of improving corporate earnings.

The MSCI Emerging Markets Index slipped 0.7 percent to 1,148.99 at 4:40 p.m. in New York, with 465 stocks retreating and 308 gaining. Brazil’s Bovespa index plunged into a bear Market, falling 1.8 percent and extending the worst performance this year among major equity markets. Argentina’s Merval index sank 2.9 percent, the most in eight months.

Russia’s benchmark slid for a fourth straight day while India’s Sensitive Index declined for a second day. The lira strengthened after Prime Minister Recep Tayyip Erdogan said the Turkish currency, this month’s worst performer in emerging markets, will find a “middle ground.”

Profit growth helped lift the MSCI emerging-market index to its highest close since July 8 yesterday even as U.S. lawmakers struggled to reach an agreement to raise the federal debt limit before an Aug. 2 deadline. Net income at the 100 companies in the MSCI index that reported results this month rose 20 percent on average, topping analysts’ estimates, data compiled by Bloomberg show.

“The emerging markets which do perform best have currencies which are not overvalued, and where inflation is not a big problem,” said John Lomax, an emerging-markets strategist at HSBC Holdings Plc, in a phone interview from London. “We can no longer treat emerging markets as a homogenous asset class, but have to pick and choose between the countries.”

Chinese Industry Grows

The Shanghai Composite Index rallied 0.8 percent. China Shipbuilding Industry Co. jumped 3.9 percent in Shanghai and Beijing New Building Materials Public Ltd. rose 4.3 percent in Shenzhen. The Chinese statistics bureau said today net income at industrial companies climbed 28.7 percent in the first six months from a year earlier, compared with a 27.9 percent gain in January through May.

Brazil’s Bovespa has fallen 20 percent from a November high after new measures to stem currency gains and concern that quickening inflation will squelch earnings growth pushed the benchmark index down. Hypermarcas SA, the Brazilian consumer-goods maker, fell 6 percent to the lowest level in more than two years. Gafisa SA, the nation’s third-biggest homebuilder by revenue, declined 2.6 percent, and has plunged 51 percent since Nov. 4 as record-low unemployment drives up labor costs. Banco Macro SA, Argentina’s largest lender by market value, slid 3.9 percent.

Competing Plans

House Speaker John Boehner’s reworked deficit-cutting plan gained support today among his fellow Republicans, while Senate Majority Leader Harry Reid said his competing proposal to avert a potential U.S. default offers the only “true compromise.” The stalemate may cost America its AAA rating, adding $100 billion a year to government costs while dragging down economic growth, according to Wall Street bond dealers.

“There will be a short-term shock for the market if there is a credit downgrade or default in the U.S.,” said Danny Yan, a Hong Kong-based fund manager at Haitong International Asset Management, which oversees $600 million. “I’m optimistic the U.S. will find a way to raise the debt ceiling” before an Aug. 2 deadline.

A report today showed orders for U.S. durable goods unexpectedly dropped in June, raising the risk that a slowdown in business investment will weigh on the world’s largest economy in the second half of the year.

Among exporters, Samsung Electronics Co., which gets about 85 percent of its sales abroad, slid 0.6 percent in Seoul. Hynix Semiconductor Inc., the world’s second-largest maker of computer-memory chips that counts on North America for about 27 percent of its revenue, declined 2.9 percent.

Kinsus Interconnect, LG Electronics

Kinsus Interconnect Technology Corp. added 4.5 percent in Taipei after the maker of chips for smart phones said profit in the second quarter rose to NT$734 million ($25.5 million). In Seoul, LG Electronics Inc. rallied 2.6 percent after the world’s third-largest mobile-phone maker posted losses at its wireless division that were narrower than analysts had estimated.

India’s Sensex sank 0.5 percent, adding to the 1.9 percent drop yesterday, when the Reserve Bank raised its benchmark interest rate by a more-than-estimated 0.5 percentage point to quell the highest inflation rate among major Asian economies. State Bank of India, the nation’s biggest lender, declined 1.7 percent.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries declined six basis points, or 0.06 percentage point, to 296, according to JPMorgan Chase & Co.’s EMBI Global Index. The Markit iTraxx SOVX CEEMEA Index of credit-default swaps for emerging Europe, the Middle East and Africa was little changed at 204, according to data provider CMA in London.

--With assistance from Berni Moestafa in Jakarta and Michael Patterson in London. Editors: John Kohut, Ana Monteiro, Stephen Kirkland, Richard Richtmyer, Marie-France Han

To contact the reporter on this story: Leon Lazaroff in New York at llazaroff@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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