Worst Emerging-Market Selloff in Years Abates on China Measures

The worst August selloff in years for emerging-market assets eased on Tuesday as China continued to drip-feed its stimulus measures.

(Bloomberg) — The worst August selloff in years for emerging-market assets eased on Tuesday as China continued to drip-feed its stimulus measures.

The month-end optimism echoed in everything from a tech-stock rally in Hong Kong to firmer iron ore prices in Singapore and a stronger South African rand. Beyond the China-themed assets however, markets were muted with currencies trading within a range and stocks paring gains. Idiosyncratic stories came to the fore with investors watching Turkish assets for the impact of last week’s interest-rate hike and Hungary on its upcoming decision. 

Despite a rebound, emerging-market equities are heading for the worst August since 2015, the year traders remember for an unexpected devaluation of the yuan that sparked global panic. This time, China is using some of the tricks from the same playbook it used then: authorities asked mutual funds not to become net sellers of stocks after a selloff erased $1 trillion from shareholder wealth. Such moves didn’t help eight years ago and some traders speculate they won’t now.

Read more: China Pledges to Speed Up Fiscal Spending to Boost Economy

Continuing hopes for stimulus from China are helping investors to take advantage of cheaper valuations that resulted from this month’s selloff. Emerging-market stocks trade at a forward price-earnings ratio of 11.8 times, below their five-year average of 12.3. The yield sovereign dollar bonds reached the highest since November on Aug. 21 and has been easing since. 

Read more: China Media Ask Stock Investors for Patience; Expect 4Q RRR Cut

Meanwhile, China’s fundamentals aren’t showing any sign of improvement. Economists surveyed by Bloomberg reduced their forecast for growth this year in the world’s second-biggest economy, to 5.1% from 5.2% seen earlier. Troubled real estate firm Country Garden Holdings Co. sought a longer grace period to pay a maturing yuan bond in an attempt to avoid a default. That follows the Evergrande group’s decision this week to postpone key votes on its offshore-debt restructuring plan.

Read more: Country Garden Seeks to Add Grace Period for Maturing Yuan Bond

As European markets opened, Turkey came under the spotlight after its bigger-than-expected rate hike last week. While the move has brought mixed fortunes for the lira, the country’s dollar bonds posted some of the best gains among emerging-market peers on Tuesday. The country’s credit default swaps eased to 378 basis points, near a two-year low. London traders coming back from Monday’s holiday may bring more volumes to the assets.

South Africa, the bellwether for emerging-market sentiment, witnessed positive spillovers from China’s stimulus plans. The rand advanced as much as 1%, the most among emerging-market currencies, while its dollar bonds competed with Turkey in the list of top 20 advancers on the Bloomberg Emerging Markets Sovereign Total Return Index.

Deutsche Bank strategists now see the most value in South Africa’s longer-term bonds on the back of a steepening of the yield curve. A fragile environment for global bonds has been adding to investor concern about South Africa’s fiscal outlook. The strategists say bonds have overpriced the country’s risk.

Hungary will announce its monetary-policy decisions between 8 a.m. and 9 a.m. New York time. While expectations are for a hold in the official rate, traders see a reduction in another rate that effectively sets borrowing costs in the economy. The convergence between the two rates is an ongoing process, but a surprise in that trend could spook markets.

Read more: Hungary to Cut Rates as Record Recession Bites: Decision Guide

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