Emerging stocks headed for the biggest gain in 10 weeks after Morgan Stanley lifted its allocation for developing equities to the highest level since April 2009 and Japan’s economy contracted less than expected.
The MSCI Emerging Markets Index increased 1.6 percent to 1,005.68 as of 10am in London yesterday, set for its largest increase since May 31. The gauge is rebounding from three weeks of losses after Standard & Poor’s cut the US credit rating and concern grew that Europe’s debt crisis may spread.
The Hang Seng China Enterprises Index rallied 4.7 percent, its biggest advance since June 2009, and indexes in Taiwan, Russia, -Turkey and the Czech Republic rallied more than 1.5 percent. Hungarian stocks surged, heading for the largest increase since August last year, as the forint strengthened against the Swiss franc.
Morgan Stanley increased its equity allocation in its multi-asset emerging-market portfolio to 58 percent, 8 percentage points over benchmark, analysts led by Jonathan Garner wrote in a report yesterday, citing “historic” low valuations and prospects the stocks would outperform developed nations’ shares.
Japan’s GDP shrank at an annualized 1.3 percent rate in the three months ended on June 30, the Cabinet office said yesterday in Tokyo, beating the 2.5 percent drop median forecast.
“Friday’s gains in major US equity indices and stronger-than-expected Japanese GDP data today have provided modest support to emerging-market Asian assets at the start of the trading week,” analysts at RBC Capital Markets, including Robert Beange in London, wrote in a note to clients yesterday, “Market sentiment remains vulnerable following last week’s extreme volatility.”
The US Department of Commerce reported a 0.5 percent increase in retail sales for last month on Friday, sparking a 0.5 percent advance in the S&P 500 Index, rounding out the biggest two-day gain for the gauge since March 2009.
A global recession remains a “relatively low risk” because of “resilient” commodities, central bank policies in developed nations and slowing inflation in emerging countries, Garner, Morgan Stanley’s chief Asian and emerging-market strategist, said in the report.
Among emerging markets, the TAIEX rallied 2.39 percent, Russia’s MICEX Index added 1.6 percent and Turkey’s ISE National 100 Index advanced 1 percent.
China’s Shanghai Composite Index climbed 1.3 percent, a fourth day of gains in its longest winning streak since June 28.
Equity markets in India, South Korea and Poland are shut for holidays.
MSCI’s emerging-market index has tumbled 12 percent this month, bound for its worst month since October 2008. It is down 13 percent this year. Valuations on the gauge slipped to 9.8 times estimated profits last week, the lowest since March 2009, weekly data compiled by Bloomberg showed.
The New Taiwan dollar is on the verge of overtaking the yuan as Asia’s best carry-trade target given its lower risk of interest-rate and currency volatility. A strategy of borrowing the New Taiwan dollar to invest in higher-yielding alternatives has generated the second-highest return over the past month among Asian currencies behind the yuan, based on the Sharpe ratio that measures risk-adjusted relative returns. The New Taiwan dollar may soon replace its Chinese peer as the region’s favored carry trade tool, analysts say, citing Beijing’s efforts to support the yuan that can create wild swings in borrowing costs. In contrast,
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