Emerging-market stocks are poised to fall as countries including China and India move closer to pushing up borrowing costs, according to Morgan Stanley.
Shares in economies experiencing the world’s fastest growth may see “corrections,” the New York-based firm said. Emerging- market stocks fell the most in three weeks yesterday after China’s central bank sold three-month bills at a higher interest rate for the first time in 19 weeks, raising concern government steps to curb lending growth will slow the economic expansion.
“The trigger for corrections in emerging-market equities could be central-bank tightening, and certainly China plays into that,” Michael Wang, a strategist at Morgan Stanley, said in an interview from London. “This is not the start of really restrictive monetary policy, but we certainly can see the market pull back in anticipation of rate hikes.”
A “correction” is commonly defined as an index’s retreat of at least 10 percent from a high.
The MSCI Emerging Markets Index fell 0.7 percent yesterday, retreating from a 17-month high, and stocks declined in Shanghai after China’s central bank sold three-month bills at 0.04 percentage point, or four basis points, higher than at last week’s auction. The emerging-market stock index posted a record 75 percent rally last year.
Options traders yesterday boosted bets that Chinese stocks will fall, placing five times as many bearish wagers as bullish ones, and bets that emerging-market shares will decline rose to the highest in a month.
‘Largest Stimulus Package’
“China had the largest stimulus package of the downturn in both percentage and absolute terms, and as they begin to bleed that off it’ll create challenges,” said Stephen Wood, who helps oversee $174 billion as chief market strategist for North America at Russell Investments in New York. “They want to slow down. The only strong growth story of 2009 was China, but in 2010 that’s not the case.”
The Chinese economy grew an estimated 8.5 percent last year, leading the world out of the first global recession since World War II, boosted by a 4 trillion yuan ($586 billion) stimulus package that included funding for roads, bridges and power plants. Policy makers will seek “moderate” loan growth while managing inflation expectations, the People’s Bank said on Jan. 6 in a report on its annual work meeting.
Chinese Growth
China’s economy is projected to grow 9.4 percent this year, while Brazil’s gross domestic product will probably rise 4.75 percent, up from an estimated 0.2 percent last year, and the U.S. will expand 2.6 percent, reversing a 2.5 percent contraction in 2009, according to the median forecasts of economists surveyed by Bloomberg.
More than 54,000 puts giving the right to sell the iShares FTSE/Xinhua China 25 Index Fund traded yesterday, more than double the four-week average.
The exchange-traded fund that tracks an index of the 25 largest Chinese stocks fell 1.6 percent to $43.87. The most- active contracts were February $40 puts, which rose 23 percent to 54 cents and accounted for almost a quarter of all bearish options trading yesterday.
“It’s quite an unusual pattern,” said Jonathan Masse, who helps oversee about $570 million at Walnut Creek, California- based AlphaShares LLC, the fund co-founded by Princeton University economist Burton Malkiel. “There’s more anxiety in the market thanks to China’s signaling tightening.”
Trading of bearish options on the iShares MSCI Emerging Markets Index Fund climbed to 174,746, the highest in a month and 66 percent higher than the four-week average. The ETF, which tracks companies in 22 nations, slumped 0.6 percent to $42.86. The most-active contracts were March $40 puts, which rose 6 percent to $1.23 on volume that was six times the average for that contract.
Write to me....