London / Singapore: Developing nation stocks fell on Monday, sending the MSCI Emerging Markets Index down over 10% from this year’s high, on concerns the economic recovery will falter as central banks raise interest rates.
The MSCI index sank as much as 1.1% to 923.48, extending its drop since 11 January to 10.2%. A close at that level would mark the first so-called correction in the 22-country benchmark index since March, when East European shares tumbled on speculation the region’s banks would lose access to credit markets.
Investors are concerned that higher borrowing costs from China to India and Brazil will restrain economic recoveries that sparked a doubling in the MSCI index since October 2008. Stocks tumbled in Shanghai on Monday as an index of Chinese manufacturing rose to a record, heightening speculation the government will take additional steps to prevent the economy from overheating.
“The gravity and the speed of monetary tightening is in the limelight,” Roger Groebli, head of financial market analysis at LGT Capital Management, said in Singapore.
The MSCI gauge fell 0.6% to 927.77 at 8.59am in New York. The extra yield investors demand to own emerging market debt over US treasuries dropped 2 basis points to 3.07 percentage points, according to JPMorgan Chase and Co.’s EMBI+ Index.
Developing nation currencies were mixed. South Korea’s won led declines against the dollar, falling 0.7%. The zloty gained the most versus the euro among 26 emerging market currencies, strengthening 1.1% after Poland moved ahead with plans to sell an estimated $1.6 billion (Rs7,408 crore) of stakes in state-owned companies to help finance the budget gap.
China’s Shanghai Composite Index sank 1.6% to the lowest level since October. The benchmark measure has dropped 10% this year, the worst performer among 94 indices tracked by Bloomberg globally. China’s Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics rose to a record.
In India, the central bank on 29 January raised the proportion of deposits banks must hold in reserve by 0.75 percentage point to 5.75% to drain excess cash that may stoke inflation. Policymakers will increase benchmark interest rates by a record 1.5 percentage points this year to curb inflation, Morgan Stanley said on Monday.
“Emerging economies are moving away from aggressive pro-growth policies,” Adrian Mowat, JPMorgan Chase’s chief Asian and emerging market strategist, wrote in a 26 January report. “Those asking about the start of emerging-market policy tightening are late; this has started.”
Haslinda Amin in Singapore contributed to this story.