Unloved Emerging Markets Showing Few Rebound Signs: Taking Stock

(Bloomberg) -- Hard-hit Asian emerging market stocks may be getting cheaper by the day, but so far investors are showing no signs of biting.

The MSCI Emerging Markets Index entered a correction last week, down 10% from mid-April, and has been in oversold territory for much of May, according to its relative strength indicator. One-year forward valuations have tumbled 9% since April, to 11.3 times earnings.

Meanwhile, flows for emerging market equity funds saw $4.3 billion in outflows for the week to May 22 as the sell-off continued, according to Jefferies Financial Group Inc. strategists Tommy Tang and Kenneth Chan.

Emerging markets, especially in Asia, find themselves under pressure on multiple fronts with the U.S.-China trade war impacting supply chains across the region, while a strengthening dollar further pressures exports.

The four largest positions in the benchmark emerging market index are Asian technology giants Tencent Holdings Ltd., Alibaba Group Holding Ltd., Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. While all four remain in the green year-to-date, the exposure leaves the gauge vulnerable to headwinds from the brewing tech cold war arising from the U.S. ban on Huawei Technologies Co.

“Yes, EM has lots of value and some markets are at recession valuations, but investors currently have no interest in the value attribute,” said Markus Rosgen, chief Asian strategist with Citigroup Inc., in a note to clients. “As things stand, the risks are to the downside -- to 850-900 on the MXEF -- rather than the upside. A trade resolution is key and with it a weaker dollar.”

Rosgen pushed out his year-end price target of 1,000 for the MSCI Emerging Markets Index to mid-2020. The gauge was down 0.4% Wednesday to just below 985.

Meanwhile, investors counting on China stimulus prompting a quick turnaround in markets are getting ahead of themselves, UBS Group AG strategists including Michael Guichon said in a note Tuesday. Any potential upswing is months or quarters away at the very least, given it takes a year to 18 months for a shift in China credit growth to translate into higher earnings expectations for the MSCI index, the strategists said.

Stock Market Summary

• MSCI Asia Pacific Index ex-Japan down 0.6%
• MSCI Asia Pacific Index down 0.6%
• Japan’s Topix index down 0.9%; Nikkei 225 down 1.2%
• Hong Kong’s Hang Seng Index down 0.4%; Hang Seng China Enterprises down 0.1%; Shanghai Composite little changed; CSI 300 down 0.5%
• Taiwan’s Taiex index down 0.2%
• South Korea’s Kospi index down 1.2%; Kospi 200 down 1.3%
• Australia’s S&P/ASX 200 down 0.7%; New Zealand’s S&P/NZX 50 down 0.5%
• India’s S&P BSE Sensex Index down 0.2%; NSE Nifty 50 down 0.2%
• Singapore’s Straits Times Index down 0.3%; Malaysia’s KLCI up 0.6%; Philippine Stock Exchange Index up 0.6%; Jakarta Composite up 1%; Thailand’s SET down 0.3%; Vietnam’s VN Index down 0.2%
• S&P 500 e-mini futures down 0.3% after index closed down 0.8% in last session

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Naoto Hosoda

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