Indian rupee and U.S. dollar banknotes (Photographer: Dhiraj Singh/Bloomberg)

Emerging-Market Rout Takes Aim at India Amid Widening Deficit

(Bloomberg) -- India became the latest epicenter of the nervousness sweeping risky assets as stocks, bonds and the rupee fell. Goldman Sachs Group Inc. said emerging-market currencies, which dropped every day but one this month, were undervalued, while Nomura Holdings Inc. warned investors not to lump all developing nations together.

The rupee sank as much as 1.3 percent, while stocks dropped the most since March and bonds fell to the lowest level since 2014. Turkey’s lira and Brazil’s real also weakened, pushing the benchmark MSCI index of currencies close to dropping below its 200-week moving average for the first time since early 2017. South Africa’s rand bucked the retreat, extending its advance to a third day.

Emerging-Market Rout Takes Aim at India Amid Widening Deficit

Though India’s current-account deficit was narrower than expected, the fact that it widened at all -- it was the biggest shortfall in five years -- was enough to rattle traders. The government asked the central bank to bolster efforts to support the rupee, Asia’s worst-performing currency in the past month, people familiar with the matter said.

Investors have been increasingly concerned about countries with unsustainable current-account and fiscal deficits as well as accelerating inflation and higher-than-average foreign ownership of domestic debt, according to State Street Global Advisors.

These are the markets that are “more prone to global mood swings,” said Abhishek Kumar, the London-based sector head for emerging markets, fixed-income beta.

Highlights:
  • MSCI index of stocks slides 0.9 percent, gauge for currencies falls 0.4 percent
  • Rupee leads retreat. Stocks fall as much as 1.3 percent and the yield on 2028 local-currency bonds climbs 13 basis points to 8.15 percent
  • India’s current-account gap widened to $15.8 billion
  • Lira curbs drop of as much as 1.4 percent after data showed Turkey’s economy expanded 5.2 percent year-on-year in the second quarter
  • South Korea’s won declines 0.5 percent; Bank of Korea is considering lowering forecast for 2018 GDP, CPI and jobs in October amid sluggish economic indicators, Chosun Biz reports
  • Russia’s ruble falls 0.5 percent. If U.S. sanctions flip Russia to basket case from haven, a fresh stampede from emerging markets could be in the cards, according to some investors and analysts
  • Rand advances every day since closing at the weakest level since 2016, adds as much as 0.8 percent on Monday. The yield on 2026 local-currency bonds rises eight basis points. The Bloomberg Commodity Index advances a second straight day

The world’s developing economies have been reeling this year from a combination of escalating trade tensions, the gradual end of central-bank policy accommodation and a raft of idiosyncratic risks from contentious elections in Brazil to controversial land-reform measures in South Africa.

For Woodman Asset Management AG, the negative local news across emerging markets has already been priced in. And since current-account deficits are lower than four years ago and inflation is relatively tame, the spike in volatility will probably wane over the next few months, according to Zurich-based Bernd Berg, a global macro and foreign exchange strategist.

There will be “entry opportunities on the horizon as many EM currencies are now undervalued after the volatile moves of the last months,” he said.

Some analysts at Goldman Sachs agree. The rout has pushed emerging-market currencies into undervalued territory, especially the real, the rand and ruble, according to analysts Mark Ozerov and Kamakshya Trivedi. They also singled out the Mexican peso, even though the currency is the only gainer among developing-nation peers so far this year.

Read more about emerging markets:
  • Cost of Hedging Emerging-Market Stocks Jumps: Volatility Monitor
  • How Far Is Too Far? Analyzing the EM Overshoot: Economics

Nomura is calling for investors to differentiate between economies across emerging markets. Analysts including Robert Subbaraman, the Singapore-based head of emerging-markets economics, used an early-warning model to show that seven nations -- Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine -- are at risk of an exchange-rate crisis, five of which are already in turmoil. South Africa and Pakistan are the standouts.

That leaves a long list of countries with “very low risk” of a full-blown crisis, the analysts said. “As investors focus more on EM risk it is important not to lump all EMs together as one homogeneous group.”

©2018 Bloomberg L.P.