Bloomberg News

Emerging Stocks Slip as European Downgrades Rattle Investors

January 16, 2012

Jan. 13 (Bloomberg) -- Emerging-market stocks fell after reports that Standard & Poor’s would downgrade European nations spurred concern for global growth

The MSCI Emerging Markets Index slid 0.1 percent to 952.92 at 4:50 p.m. in New York. Brazil’s Bovespa Index fell 1.3 percent and Mexico’s benchmark lost 2.1 percent. Turkish stocks dropped 1.1 percent. The BUX Index jumped 1.9 percent as Hungary tried to restart bailout talks.

S&P lowered France’s credit rating by one level to AA+ and cut Portgual’s to junk levels. The company also dropped ratings for Italy and Spain. The downgrades could decrease investors’ appetite for risk and intensify concern the global economy will slow.

“If the euro-zone issues do not get resolved, then that starts to spread more into not only the region but also the global growth picture, because it starts to pull down global growth,” Simon Quijano-Evans, the head of emerging-market research at ING Groep NV, said in an interview. “The euro-zone and the wider European Union is a large trading partner. Nobody has an interest to see them fall or break apart.”

Global emerging-market stocks advanced 2.8 percent this week, the most since the period ended Dec. 2, as borrowing costs fell for Italy and Spain at debt auctions. The emerging market gains bested the 0.8 percent advance for developed-nation shares. The MSCI Emerging Markets index trades for 9.7 times estimated earnings, lower than the 11.6 multiple for the developed-nation measure.

Ratings Downgrades

The downgrades, which came after the close of trading in New York, could threaten the European Financial Stability Facility’s lending capacity. The bailout mechanism is funding rescue packages for Greece, Ireland and Portugal and is guaranteed by Europe’s top-rated nations.

S&P reaffirmed Germany’s top rating and raised the outlook to stable from negative. France’s AA+ rating has a negative outlook.

Cyprus, Italy, Portugal, and Spain were cut by two notches, S&P said. The long-term ratings on Austria, Malta, Slovakia and Slovenia were reduced one level.

Greece’s creditors said today they had failed to agree with authorities about how much money investors will lose by swapping their bonds. Holders of Greek debt have agreed to a 50 percent cut in the face value of the credits, while the coupon and maturity of the new bonds remain in dispute.

Global emerging-market funds drew $1.6 billion of inflows in the week ended Jan. 11, Citigroup Inc. said today, citing data from fund researcher EPFR Global.

The Bovespa fell for a second day, its worst streak of declines since Dec. 19. Mining companies Vale SA and MMX Mineracao & Metalicos SA dropped as lower metal prices dimmed the outlook for Brazilian raw materials producers.

Hungary Talks

Hungary’s forint depreciated 0.8 percent against the euro after the International Monetary Fund said it expected “tangible steps” from the country’s government before deciding whether to start talks on financial aid. Hungary is working to revive bailout talks with the IMF and the European Union after international creditors suspended negotiations last month on concern new central bank legislation violates monetary-policy independence.

The Shanghai Composite Index lost 1.3 percent, declining for a third day, as Credit Suisse Group AG and Royal Bank of Scotland Group Plc said inflation would hamper the government’s ability to ease monetary policy.

The extra yield investors demand to own emerging-market debt over U.S. Treasuries increased eight basis points, or 0.08 percentage point, to 441, according to JPMorgan Chase & Co.’s EMBI Global Index.

--With assistance from Jason Webb in London. Editors: Alex Nicholson, Robert Valpuesta, Glenn J. Kalinoski

To contact the reporters on this story: Berni Moestafa in Jakarta at bmoestafa@bloomberg.net; Zachary Tracer in New York at ztracer1@bloomberg.net.

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


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