London: Developing-nation stocks fell for a second day on concern the 52% rally in the MSCI Emerging Markets Index this year has outpaced the prospects for profit growth.
China’s Shanghai Composite Index dropped for the first time in five days, after surging 88% this year and pushing the valuation to 37 times reported earnings.
Posco, South Korea’s biggest steel maker, led a 0.4% retreat in the nation’s benchmark Kospi Index after Citigroup Inc. said the shares already reflect higher steel prices and production.
Currencies weakened against the dollar and the euro, led by Hungary’s forint and the Czech koruna.
The MSCI Index posted on Wednesday its first back-to-back declines since 13 July. The 22-country gauge was valued at 17.8 times reported earnings on 3 August, the most expensive level since 29 October 2007, when it traded at 18 times, Bloomberg data show.
“All these emerging markets have rallied significantly,” Charles de Vaulx, a money manager at International Value Advisors, said in an interview from New York. “We don’t want to chase those stocks.”
The extra yield investors demand to own emerging-market bonds over US treasurys dropped 4 basis points to 3.48 percentage points, the lowest level since September, according to JPMorgan Chase and Co.’s EMBI+ Index.
Russia’s Micex Index climbed 2.3%, while the ISE National 100 Index in Turkey added 0.9%.
Stocks in eastern Europe are poised to outperform Asian emerging markets as investors’ risk appetite increases and fewer reports on the global economy beat economists’ estimates, according to ING Investment Management.
Gains in eastern Europe equities depend most on investors’ willingness to add risk, according to ING’s Maarten-Jan Bakkum, who uses the JPMorgan EMBI+ Index as a gauge of risk appetite. “Asia’s reliance on exports makes global economic growth more important,” the strategist said in an interview.