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The Accumulator: emerging markets fight back

Brazil's stock market surged and emerging markets outpaced the developed world as the dollar took a dive this week.

 

by Sam Antrobus on Feb 05, 2016 at 16:24

The Accumulator: emerging markets fight back

Brazil has proved to be the toast of emerging markets this week, as a weakening dollar and mining sector turnaround helped bring relief to the beleaguered South American country.

As shown by our exclusive Accumulator data table, which covers the five days to yesterday, the MCSI Brazil index blew global markets out the water with a 9.1% surge. The index is now the best performing major global stock market this year in pound terms, albeit it has still made a 2.1% loss.

A further surge in the Brazilian real, which is now the best performing emerging market currency this year, helped. But for a country in which commodities account for around half of all exports, the real joy can be found in the rising price of metals.

Stabilising commodity prices lie at the heart of the Brazilian comeback, as gold hit a three-month high and copper climbed. Silver meanwhile led gold, with rises of 3.1% and 1.2% respectively, as our table shows. Although Brent crude suffered a 2.7% loss, the international benchmark was still trading in a range of around $34-$35 today - well up on the 12-year lows experienced last month.

Brazil was not the only beneficiary, with the mining-heavy FTSE 100 also receiving a much needed boost, helping to restrict losses to just 0.5% during a week in which a sell-off in banking stocks was compounded by huge losses from one of its biggest constituents, BP (BP).

But almost all of the good news in global markets this week has come from emerging markets, with the Shanghai Composite index enjoying a timely 3.3% rise. Expected moves to cut crude steel capacity helped steelmakers power the index higher, while the MCSI Emerging Markets index was up 1.1%.

The sub-plot to much of the success enjoyed by emerging markets this week however, can be found in the falling dollar. Weakness in the US currency typically helps emerging markets as it reduces the cost of its dollar debt. 

Comments made this week by the new chief of the Dallas Federal Reserve Bank, Robert Kaplan, suggesting the US Federal Reserve must be ‘patient’ on another interest rate rise have lowered expectations of a further hike.

This left the dollar down 1.3% against sterling and close to registering its worst weekly drop since October 2011 – although with data released today showing a pickup in US wages during January, the dollar rebounded slightly and sentiment towards a Fed hike could once again turn.

The weakness of the dollar meant that sterling hit a one month high against its US counterpart this week, rising 0.4% to $1.46, gaining more than 4% from its seven-year low last month.

European stocks were the worst performers of the week, with the MSCI Europe ex UK index down 1.2%.

German stocks endured a particularly difficult week, with the DAX 30 down 1.8%. The strength of the euro, up 0.8% against the pound, spells bad news for Europe's export-driven economies – although should the European Central Bank pull the trigger on further monetary stimulus next month as expected, then a stronger euro could prove to be short lived.

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