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London - Emerging-market stocks advanced as traders predicted the Federal Reserve will hold off on raising interest rates this week, shoring up demand for riskier assets whose valuations tumbled in the past month amid growing signs China’s economy is slowing. Turkey’s lira slid.
The MSCI Emerging Markets Index rose 0.4% to 805.86 by 12:12 in London, building on the biggest weekly rally since April. Traders put the odds for a Fed rate increase at the September 16 to September 17 meeting at 28%, compared with 38% on August 31.
The prospect for higher US borrowing costs and China’s shock devaluation last month led investors to flee riskier assets, pushing forward price-to-earnings ratios for emerging-nation stocks down to 10.7, a 29% discount to equities in developed countries.
While data showing a slowdown in Chinese industrial output sent the Shanghai Composite Index to its steepest loss in three weeks on Monday, Malaysian shares jumped the most in two years as the government said it will tap a fund to support the equities.
Banking shares in Istanbul dropped for a fourth day as Citigroup Inc. downgraded some lenders to sell, saying the weaker currency was eroding their capital buffers. The lira dropped to a record following its longest stretch of weekly declines since 1999.
“The market is not positioned for the Fed to raise rates,” said Aurelija Augulyte, a senior strategist at Nordea Bank AB in Copenhagen, who favors commodity currencies like the Brazilian real and South African rand after they "overshot" their fair values.
“The Fed is not in a rush and even if they do hike, which they might, they will talk down the rate path, and maintain the gradualist tone, which should be emerging-market positive.”
Malaysian support
A gauge tracking 20 emerging-market currencies was little changed on Monday, while the premium investors demand to own developing-nation debt over US Treasuries widened one basis point to 394, according to JPMorgan Chase indices.
Of 96 analysts surveyed by Bloomberg, 45 expect no change in the Fed Funds rate at 0.25%, while 48 see an increase of 25 basis points and three project 13 basis points of tightening.
Nine out of 10 industry groups in the MSCI Emerging Markets Index rose, led by energy and utility companies.
State- controlled enterprises led the 2.3% rally in Kuala Lumpur after Prime Minister Najib Razak said the government will "reactivate" ValueCap with funds of as much as $4.6bn. Tenaga Nasional Bhd., a government- controlled power utility, jumped 6.6%, the most since December 2013.
The Philippine Stock Exchange Index advanced 2.3%, led by a 6.2% gain in SM Investments. Indian shares rose 1.1% after factory output and inflation data signaled an improving outlook for Asia’s third-biggest economy. The FTSE/JSE Africa All Share Index climbed 0.8% while Russia’s Micex Index added 1%.
China risks
Data out of China show that risks remain to developing countries, particularly those that rely heavily on the world’s second-largest economy for their exports. The Shanghai Composite fell 2.7% after industrial output rose 6.1% in August from a year earlier, missing the 6.5% estimate.
Investment in the first eight months also increased at the slowest pace since 2000.
The Turkish lira, which has fallen more than any emerging- market currency apart from the Brazilian real in the past month, slid to as weak as 3.0687 per dollar, an all-time low.
The Borsa Istanbul banking index retreated 0.7% as lenders including Turkiye Garanti Bankasi AS and Turkiye Halk Bankasi AS fell after Citigroup lowered them to sell from neutral.
