Emerging market equities extend winning streak

Emerging market equities began the week by rallying for an 11th straight day, the longest uninterrupted streak of gains in 12 years, with sentiment bolstered by speculation that the US Federal Reserve will refrain from raising rates in the coming months.

The US central bank had been widely expected to increase interest rates in June, but a smattering of disappointing economic data has forced economists to push back their forecasts until September, or even later this year.

US interest rate increases and a strengthening dollar have typically proven painful for emerging markets. Widespread bets on the Fed moving this year had already buoyed the US dollar and sent stocks, bonds and currencies in the developing world lower in recent months.

Signs that the Fed may now hold fire sent the FTSE Emerging Index up another 1.1 per cent on Monday, its highest level since last September. The gauge has now climbed 7.7 per cent already this month, the longest winning streak since October 2003. Should the market retain these gains, April will be the best month for EM equities since January 2012. EM bond markets have also rallied sharply.

"Weaker than expected data in the US and the prospects of a delay in the upcoming Fed cycle momentarily reignited the appetite for yield in EM" analysts at Deutsche Bank wrote in a note.

The biggest drivers have been the rocketing Chinese stock market - the Hong Kong Hang Seng is up 12.5 per cent this month, and the Shanghai Composite by 9.7 per cent - and sharp recoveries in the previously pummeled Brazilian and Russian bourses.

Even analysts who remain pessimistic on the longer-term outlook for the developing world's markets have had to throw in the towel. JPMorgan late last week shelved its "underweight" recommendations on EM equities on the view that the rally could extend further - at least in the short term.

"We don't see a fundamental driver of the EM rally beyond the boost in sentiment from the sharp appreciation of the Chinese equity market," the bank's analysts wrote. "But given how oversold EM equities got earlier this year, we believe this technical rebound has further to go, especially as it is broad based and not just confined to Chinese equities."

However, the emerging markets relief rally comes in spite of many investors betting that the first-quarter weakness in the US economy is a blip, which would still set the Fed on course to raise rates this summer or autumn.

The dollar has recovered strongly from its recent correction, and despite rising EM bond and stock markets, the currencies of the developing world remain under the cosh. The JPMorgan Emerging Market Currency Index slipped another 0.3 per cent on Monday, and remains close to a record low.

So-called frontier markets - bourses in more exotic countries such as Argentina, Vietnam, Romania and Bangladesh - have also failed to ignite on hopes of a Federal Reserve reprieve. Despite an 11.7 per cent gain in the Nigerian stock market, the FTSE Frontier 50 gauge has only edged 3 per cent higher this month, and remains almost 17 per cent down from its peak last September.

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