The anxiety over emerging-market stocks has subsided, and even Brazil’s election results are just a blip in the larger world of developing countries.
Seven days after climbing to a 16-month high, the Chicago Board Options Exchange Emerging Markets ETF Volatility Index, used to gauge investor trepidation, had its biggest weekly drop in almost three years. The gauge ran off eight consecutive days of declines, the longest streak on record.
Options sellers are charging less for protection against emerging-market stock losses even as Brazil’sbenchmark equity index fell to a six-month low the day after Oct. 26’s election. With Europe at risk of deflation and U.S. investors facing the end of quantitative easing, developing countries from India to Mexico have outlined commitments to economic improvement. That’s making the panic subside, according to Mark Luschini of Janney Montgomery Scott LLC.
“The sense is that emerging markets have fewer economic headwinds right now than developed countries,” Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott, which oversees $67 billion, said in an Oct. 28 phone interview. “People have gone long emerging-market equities. What’s happening in Brazil is idiosyncratic and not indicative of all emerging markets.”
Luschini currently owns emerging-market stocks from Mexico, Vietnam and China.
Brazil Election
The optimism is offsetting concern about Brazil, which saw the Ibovespa stock index tumble as much as 6.2 percent on Oct. 27, a day after President Dilma Rousseff won re-election.
“Money tends to be fluid in flowing to where the least uncertainty is,” Bruce McCain, who helps oversee more than $25 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in an Oct. 24 phone interview. “The stronger internal growth dynamic, along with cheaper valuations, make these markets more interesting to investors than they have been.”
The emerging-markets volatility gauge plummeted 23 percent last week, the most since December 2011. The record eight-day drop included a plunge of 9.1 percent on Oct. 21.
Options on the iShares MSCI Emerging Markets ETF cost 2.4 points more than those on theSPDR S&P 500 ETF Trust (SPY) on Oct. 27, according to three-month implied-volatility data compiled by Bloomberg. That was the narrowest spread since March 2013 and compares with an average of 6.2 points in the past year.
Even amid renewed optimism around developing markets, growth in a bloc consisting of Brazil, Russia, India, China and South Africa will slow to 5.2 percent this year, economists forecast. That would be down from 5.7 percent in 2013.
Sao Paulo's Stocks Exchange (Bovespa) headquarters in downtown Sao Paulo, Brazil. Options sellers are charging less for protection against emerging-market stock losses even as Brazil’s benchmark equity index fell to a six-month low the day after Oct. 26’s election.
Mexico President Enrique Pena Nieto has tried to stimulate his country’s economy by allowing private investment in the state-controlled energy industry and promoting competition in telecommunications.
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