Correction Grips Emerging Markets as Stocks Erase 2021 Advance

A benchmark gauge of emerging-market stocks erased gains for the year and pointed to further pain ahead as a surge in U.S. yields and patchy economic recovery sapped risk appetite.

MSCI Inc.’s stock index fell as much as 0.9% on Thursday, its fifth day of declines and the longest losing streak in more than six months. The index extended its retreat from a record high in February to more than 10%, generally considered the threshold for a correction. Technical patterns deteriorated.

Correction Grips Emerging Markets as Stocks Erase 2021 Advance

“Higher U.S. yields and a firmer dollar alongside investors either moving to safer shores or taking profits on past gains are clearly hurting emerging-market equities,” said Mitul Kotecha, chief EM Asia & Europe strategist at TD Securities Ltd. in Singapore. “It’s hard to see a reversal in the short term, with pressure likely to be maintained for now.”

The surge in U.S. yields and a wave of monetary tightening in nations from Brazil to Russia this month is raising concern the rally in emerging stocks can’t be sustained. Since March last year, developing-nation assets have skyrocketed as investors clamored for higher returns in a world awash with central-bank liquidity and negative-yielding securities.

Relative Value

Emerging-market stocks are now extending their underperformance relative to U.S. stocks to a fourth year as poorer nations are unable to match the world’s largest economy in the pace of vaccination or the amount of money being pumped into its post-pandemic recovery. The ratio between the MSCI gauge and the S&P 500 Index has sunk to the lowest level in four months.

That’s emboldening bears to bet a rebound rally since March 2020 is over in the developing world.

Short-sellers have locked up a record amount of money calling for declines in one of the largest U.S. exchange-traded fund focusing on the asset class -- the $76 billion Vanguard FTSE Emerging Markets ETF. The contracts, worth $3.1 billion, account for 4.1% of the fund, the most bearish level in seven years.

Correction Grips Emerging Markets as Stocks Erase 2021 Advance

From a technical perspective, stocks have shifted to showing bearish momentum. The benchmark MSCI gauge has not only fallen below its 100-day moving average for the first time since June, it’s come within four points of breaching the 23.6% Fibonacci retracement level of the rally since March. If that support is broken, further losses may ensue.

Adding to this pressure is the ongoing formation of a bearish head-and-shoulders pattern. If the gauge falls below the 1,270 mark, where the neckline runs, that could bring a fresh selloff with the next major support level at about 1,100.

Correction Grips Emerging Markets as Stocks Erase 2021 Advance

But there are silver linings. Analysts continue to raise their estimates for corporate profit. The 29% increase in consensus forecasts since June mainly underscores optimism about Asian economies including China.

Also, ETF flows have held up despite losses over the past month. Investors poured money into emerging-market stocks and bonds for a 20th week, in a streak worth $34 billion.

Analysts’ optimism and ETF flows, however, can be lagging indicators. Without clear signals on improved vaccination drives and quicker pathways to recovery, emerging markets may struggle to resume their rally at a time when safer U.S. bonds have begun to offer better returns.

©2021 Bloomberg L.P.

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