Emerging-market equities posted the best month since 2022, fueled by rallies in Asian technology shares on optimism over artificial intelligence demand, even as oil supply shock persists amid a US-Iran standoff over the Strait of Hormuz.
MSCI’s index for emerging equities gained 14.5% in April, reversing the losses that followed the start of the war. Before a technical index adjustment at the end of day, the gauge was on track to notch the best monthly rise in 17 years.
The climb "appears to reflect more than a short-covering rally,” said Malcolm Dorson, a senior portfolio manager at Global X Management. "We still see room for further upside.”
Even with the rally, developing world stocks look cheap versus the US market after analysts lifted profit forecasts for emerging-market companies by 30% this year, dwarfing an average 10% upgrade for S&P 500.
Risk sentiment was mixed on Thursday, with developing-nation stocks sliding 1.1% as most individual currencies gained against a weaker dollar. While crude prices retreated from four-year highs, they held well above $110 a barrel, and fears remain that the Iran conflict is set to escalate.
Axios reported that US President Donald Trump is set to receive a briefing on new military options for action, while Iran’s new supreme leader vowed to guard the country’s nuclear and missile technologies.
"Markets grew more concerned with the Axios report about Trump discussing military targets again,” said Francesco Pesole, FX strategist at ING Bank NV.
The latest setback suggests a reckoning for all who were betting that the war in Iran was winding down and the oil-price shock would be limited. It’s redrawing the lines even more acutely across emerging markets, according to Anthony Kettle, senior portfolio manager at RBC Bluebay Asset Management.
A group of Asian currencies from oil-importing nations, including the Malaysian ringgit, Indonesian rupiah, Taiwanese dollar and Indian rupee, have borne heavy losses, slipping further on Thursday. The benchmark for EM currencies slipped 0.1%.
JPMorgan Chase & Co. strategists slashed their bullish stance on emerging-market currencies to market weight Thursday, saying high valuations, positioning in foreign exchange, and rising stagflationary risks call for caution.
They turned bearish on Asia currencies and remain overweight in higher-yielding names in Latin America and Eastern Europe, Middle East and Africa.
"There have been large local market performance divergences since the start of the Iran conflict, driven by underlying oil exposures and yields, with low yielding oil importing EM Asia meaningfully underperforming high yielding oil exporting Latam,” the strategists including Luis Oganes and Jonny Goulden wrote in a Thursday note.
"We expect these divergences to persist and are positioned accordingly in our country allocations.
Meanwhile, politics are weighing heavily on some markets. Colombia’s central bank unexpectedly halted a series of interest rate increases that had provoked a bitter clash with the government, leaving key rate at 11.25% in a unanimous decision. The Romanian leu fell 1.8% against the euro as a government crisis escalated. - Bloomberg
