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New York - The panic gripping emerging market investors took a turn for the worse on Monday as Chinese equities fell the most since 2007, sending shockwaves across developing countries from the Philippines to South Africa.
The Shanghai Composite Index slid 8.5% as concern mounted that China’s economic slump is deepening and government measures to stop it will fail.
A further slowing of growth in the world’s second-largest economy would undermine demand for commodities and curtail imports from countries including Brazil, South Africa and Russia - all of which count China as their biggest trading partner.
As oil plunged toward $40 a barrel in London, Saudi Arabian stocks fell deeper into a bear market, the rand weakened to an all-time low and the rouble surpassed 70 to the dollar for the first time since February. Political turmoil in Turkey and Malaysia has added to the negative sentiment weighing on developing countries as investors assessed the prospect for higher US interest rates.
“It makes it very hard to risk manage in an environment of such violent moves,” said Michael Wang, a strategist at Amiya Capital LLP in London who favours Korea, Taiwan and India, while warning against Brazil and Southeast Asia.
“Emerging markets could trade lower in the absence of any policy moves from China or if the Federal Reserve goes ahead and hikes in September."
Rand meltdown
Equities in Vietnam, India, the Philippines and Saudi Arabia dropped at least 5.3%, while Ibovespa futures slumped 4.7% in Sao Paulo. The MSCI Emerging Markets Index fell 5% to 771.97 by 13:14 in London, bringing its seven-day retreat to 11%, the most since September 2011.
A gauge tracking 20 of the most-traded currencies depreciated 0.8% to a record low. The rand sank to as weak as R14.0682 per dollar, before trimming losses to 13.2643. South African assets are under pressure as the price of export products from platinum to iron ore retreat.
READ: Rand sinks most since 2011 as commodities tumble
The rouble weakened 2.4% to 70.8270 per dollar, a level it hadn’t reached since January 30, when the central bank started a cycle of interest-rate cuts. ING Groep said the rouble may drop to 75 per dollar if oil falls to $40. The currency and Russian bonds retreated the most among developing nations, with yields on five-year local-currency debt jumping 38 basis points to 12.33%.
Biggest losses
Concern over Russia’s ability to cope with crude prices that have lost a third of their value in the past three months is exacerbating outflows. The country, which derives about 50% of revenue from oil and gas industries, is also under sanctions from the US and Europe over its role in the conflict in Ukraine.
“There is every chance we go lower in the coming weeks" in emerging markets, Nathan Griffiths, a senior emerging market equities manager who helps oversee about $1.2bn at NN Investment Partners in The Hague, said by email. “There is the risk we start to see significant outflows as investors protect capital."
Malaysia’s ringgit also suffered from the rout in crude, with the currency plunging to another 1998 low against the dollar. The energy drop coincides with a political scandal involving Prime Minister Najib Razak.
Turkish assets, which would benefit from the slide in oil since the country is a net fuel importer, are falling due to security concerns and after the collapse of talks for a coalition government necessitated a call for a second election. The lira weakened 1.3% to 2.9566 per dollar, after crossing 3 to the dollar for the first time ever last week.
‘Real disaster’
Today’s slide happened after China said over the weekend it will allow pension funds to buy shares for the first time, while a speculated cut in bank reserve ratios failed to materialise.
More than $5trn have been wiped from the value of global stocks since China’s shock devaluation of the yuan two weeks ago. Investors withdrew $1.9bn from US exchange-traded funds that invest in emerging market stocks and bonds last week as gauges in Taiwan, Brazil and Indonesia entered bear markets.
“This is a real disaster and it seems nothing can stop it,” Chen Gang, Shanghai-based chief investment officer at Heqitongyi Asset Management Co.
