Tech Tumult Rocks Foundations of Emerging-Market Stock Rally

(Bloomberg) -- The global selloff in technology shares is helping derail one of this year’s top-performing stock trades.

After handing investors their biggest returns in eight years in 2017, signs are mounting that the MSCI Emerging Market Index is starting to reverse course. The gauge is down about 5 percent since reaching a six-year high in late November and is testing a break below its 100-day moving average for the first time since January.

While a pickup in worldwide growth is still buoying optimism about the developing economies that underpin the index, traders are playing safe and locking in profits as a selloff in U.S. technology stocks spreads jitters across global markets. Tech companies, mainly from Asia, make up 28 percent of the emerging-markets gauge.

“If global IT comes down, EM struggles,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in the Hague, who reduced his overweight on emerging-market stocks last week for the first time this year. “Investors want to protect performance before the end of the year.”

Hong Kong’s benchmark index fell the most in 13 months on Wednesday as heavyweights such as Tencent Holdings Ltd. retreated and amid concern inflows from mainland China will slow. Emerging-market information and technology shares have fallen 6.7 percent in the past five days to the lowest level in two months.

The tech selloff could cause more pain for Chinese and Asian markets in the coming weeks, while rising expectations of U.S. rate increases would add pressure to countries with large external financing needs, such as Turkey, Bakkum said.

In another sign bears have asserted themselves, the emerging-market index has fallen below a technical channel in which it has traded over the course of this year. The gauge is also struggling to hold above the retracement level of its slump between 2011 and early 2016. If it drops 1.1 percent more and breaches that support, it could be a sign of another 7 percent loss, according to a Fibonacci study.

Investors and analysts are still broadly optimistic about the outlook for developing nations in 2018. NN’s Bakkum says he will consider going back to overweight early next year, while more than 90 percent of money managers polled in a UBS Group AG survey published Wednesday expect the index to rise again in 2018, albeit at a slower pace than in 2017.

“Risks remain but are less particular to EM and instead more global in nature,” Emil Wolter, a Paris-based money manager at Comgest SA, said in a research note. “We are cautiously optimistic for the prospects of the asset class in 2018.”

To contact the reporters on this story: Natasha Doff in Moscow at ndoff@bloomberg.net, Srinivasan Sivabalan in London at ssivabalan@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma

©2017 Bloomberg L.P.