Bloomberg News

Emerging Stocks Drop First Day in Three on Europe Debt Concern

November 16, 2011

Nov. 15 (Bloomberg) -- Emerging-market stocks fell for the first time in three days as Italy’s premier-in-waiting struggled to form a new cabinet and Italian and Spanish yields climbed, deepening concern Europe’s debt crisis will intensify.

The MSCI Emerging Markets Index dropped 0.8 percent to 969.20 at 5:11 p.m. in New York. Poland’s WIG20 Index slipped as much as 2.1 percent after Moody’s Investors Service said it may downgrade the country’s banking industry. Benchmark gauges in India and the Czech Republic lost more than 1 percent. Russia’s Micex index rose 0.2 percent. Chile’s Ipsa index gained 0.5 percent while Mexico’s IPC rose 0.6 percent. Brazil’s stock market was closed for a holiday.

Spain sold less than its maximum target of debt at a bill sale today as financing costs rose, while a retreat in Italian bonds sent the extra yield investors demand to own the country’s debt over benchmark German bunds to a record as premier-in- waiting Mario Monti struggled to get political parties to help form his new cabinet. Economic growth in Europe failed to accelerate in the third quarter, the European Union’s statistics office said today. Monti said after European markets closed that he is convinced Italy can overcome the crisis and he’ll meet with President Giorgio Napolitano tomorrow to present his Cabinet.

“There’s a growing sense that the new government in Italy will not necessarily help the situation in the way some people thought it would,” Neil Shearing, a London-based senior emerging-markets analyst at Capital Economics Ltd., said in a phone interview. “There is a growing sense that changing governments in these countries are not necessarily going to overcome any of the economic problems they face. There are likely going to be other European countries dragged in, too.”

Yield Spread

The extra yield investors demand to own emerging-market debt over U.S. Treasuries was at 399, according to JPMorgan Chase & Co.’s EMBI Global Index. The Markit iTraxx SovX CEEMEA Index of eastern European, Middle East and Africa credit-default swaps rose 33 basis points to 344, according to data provider CMA.

Moody’s cut the outlook on Polish banks to negative from stable, reflecting “the expectation that the banks’ operating environment will deteriorate” along with credit conditions over the next 12-18 months, Irakli Pipia and Yves Lemay, analysts at in London, wrote in a report today.

The euro region’s debt crisis may damp demand for eastern European exports and lower inflows of capital, similar to 2008, the European Bank for Reconstruction and Development said today in its annual Transition Report on the 29 former Soviet bloc countries where it invests.

The Czech PX Index slid as much as 2 percent as a report showed growth stalled in the third quarter for the first time since 2009.

India, China

India led Asian emerging market stock declines with a 1.4 percent drop on the BSE India Sensitive Index, or Sensex. South Korea’s Kospi index fell 0.9 percent. The Hang Seng China Enterprises Index in Hong Kong lost 0.8 percent, while Taiwan’s Taiex Index declined 0.5 percent.

Hon Hai Precision, the world’s largest contract maker of electronics, declined 1.6 percent in Taipei trading. The company earned about 30 percent of last year’s revenue from Europe, data compiled by Bloomberg show.

South Africa’s rand led emerging-market currencies lower, weakening 2 percent against the dollar. The Chilean peso depreciated 1.4 percent, while India’s rupee fell 0.8 percent.

MSCI’s emerging-market index has fallen 16 percent this year, compared with a 6.9 percent slide for the MSCI World Index, as the European debt crisis heightened concern of slowing growth among emerging markets such as Brazil and China where faster inflation prompted policy makers to raise interest rates. Shares in the developing-market gauge are trading at 10.4 times estimated earnings compared with 12 times for the MSCI World, according to data compiled by Bloomberg.

‘Soft Landing’

The gauge for developing nations may rebound 39 percent by the end of 2012, spurred by a “soft landing” for China’s economy, earnings growth and cheap valuations, Jonathan Garner, Morgan Stanley’s chief emerging-market and Asia strategist, said in an interview from Singapore today.

“Inflation is probably going to fall going forward and we hope for a soft landing,” Garner said. “We should be in a better environment for the stock market.”

Morgan Stanley favors China most among emerging markets in Asia. Garner said he’s avoiding Indian and Taiwanese equities because of deteriorating returns.

--With assistance from Berni Moestafa in Jakarta. Editors: Stephen Kirkland, Ash Kumar, Glenn J. Kalinoski

To contact the reporters on this story: Ksenia Galouchko at kgalouchko1@bloomberg.net or; Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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