Emerging-market October sell-off signals consolidation in store

Emerging markets are poised to end October in the red as the global stock sell-off, concern over the Federal Reserve’s tightening path and an escalation in the US-China trade war scupper the chance of a recovery in this year’s worst-hit economies.

The MSCI Emerging Markets Index of equities has fallen 9.2% in October, set for its worst month since August 2015, after the S&P 500 Index slipped into a correction from a record close in September. An MSCI measure of developing-nation currencies is down almost 1%, even as the Argentine peso, Turkish lira and Brazil’s real head for a winning month.

“October was a month where risk-off mood dominated in emerging markets triggered by declines in US equities, amid various uncertainties including US-China trade frictions,” Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo, said in a phone interview. “But I don’t see any reasons that would justify a further sell-off in emerging markets, nor do I see them sharply rising from here. What we’re going to see is more of a consolidation.”

The Argentine peso is on track to become the top performer among its peers this month as the International Monetary Fund approved a larger amount of funding. The Turkish lira was bolstered by easing political tensions with the US, while the Brazilian real gained on optimism over a victory by market-friendly Jair Bolsonaro in its presidential election.

Still, plenty of headwinds remain for emerging markets. The International Monetary Fund cut its global growth forecast for the first time in more than two years, blaming escalating trade tensions and stress in developing nations. The Chinese yuan is hovering around its weakest level against the dollar in a decade, amid concerns over the escalating trade row.

While “idiosyncratic developments” have allowed some currencies to claw back their recent losses, the higher US rate outlook remains a major headwind for emerging markets, as do ongoing trade tensions and signs of further slowing in China, Win Thin, head of global currency strategy in New York at Brown Brothers Harriman & Co., wrote in a note.

Here are some notable moves in EM stock markets in October:

Ibovespa Brasil Sao Paulo Stock Exchange Index has risen nearly 10%, the top performer among the world’s major indexes tracked by Bloomberg South Korea’s Kospi index has dropped 13%, the worst performer in the world as it entered a bear market FTSE/JSE Africa All Share Index drops 6.1%, set for the worst month since February 2009

Many of the headwinds buffeting emerging markets should eventually abate if the dollar loses steam when the economic stimulus from tax cuts wears off next year, according to Gary Greenberg, the London-based head of emerging markets at Hermes Investment Management. He also added that US policies could become “less bellicose” with a potential Democratic majority in the House following the US mid-term elections set for next week.

“We see reasonable growth, low interest rates and sensible economic policies in the majority of countries comprising the EM benchmark” of stocks, Greenberg wrote in a note.