Sunday 26 April 2009

Re-emergence of emerging markets may be short-lived

Short-sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal that the biggest rally in 16 years may fizzle as profits plunge from Brazil to Taiwan.

1 comment:

Guanyu said...

Re-emergence of emerging markets may be short-lived

Michael Patterson and Alexander Ragir
26 April 2009

Short-sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal that the biggest rally in 16 years may fizzle as profits plunge from Brazil to Taiwan.

Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 per cent in March, the biggest jump in two years.

The growth in short sales, where investors borrow stocks and sell on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases traders closed out their bets. The MSCI gauge, up 32 per cent from its 2009 low on March 2, may drop 10 per cent in coming weeks as falling earnings dampen investor optimism, ING Investment Management’s Eric Conrads said.

“We aren’t out of the woods,” said Mr. Conrads, who started betting against developing-nation equities this month, convinced the stocks were in a “bear-market rally”.

The MSCI index is down around 3 per cent from a six-month high on April 16.

The iShares fund mimics the performance of the MSCI index and can be bought and sold like a stock.

Traders who increased short positions in the iShares fund during the 40 per cent rally in emerging-market stocks from August to October 2007 proved prescient.

The MSCI gauge peaked at a record 1,338.49 on October 29, 2007, and tumbled 66 per cent through to October 27 last year, the worst bear market in the index’s 20-year history.

MSCI’s emerging-market index climbed 34 per cent from last October to January as short-sellers ended 52 per cent of their bets against the iShares fund on speculation that the worst of the contraction was over.

As the index kept climbing in March, posting its best month since 1993, short interest surged to 96.1 million shares, or 11 per cent of the fund’s total shares outstanding.

Equity prices climbed too fast after March 1 given the outlook for earnings, said Martin Herbon, who manages a Latin America hedge fund.

Emerging-market profits may drop 26 per cent this year, according to Citigroup. Taiwanese companies may post a 29 per cent slide in net income and Brazilian earnings may fall 37 per cent, the most in Latin America, the New York-based bank said.

Increases in short sales sometimes send false sell signals. The MSCI gauge rose 16 per cent in three months after a 41 per cent jump in short interest in September 2006. When short sales climbed 59 per cent in March 2007, the MSCI gauge added 19 per cent in the next three months.

Traders were too bearish and the latest equity rally was the beginning of a new bull market, observers said.

“The market is beginning to tentatively price in the likelihood of an economic recovery,” said Christopher Palmer, head of emerging markets at Gartmore Investment Management.