China Brokerage Probe Worsens Weekly Selloff in Emerging Markets

November 26, 2015 — 7:07 PM PST Updated on November 27, 2015 — 8:40 AM PST

Lira fell most since July this week on Russia jet tension
China brokerages slump on official probe into market rout

A weekly selloff in emerging-market assets worsened as Chinese brokerages disclosed regulatory probes that sent shares tumbling. Turkey’s lira headed for the biggest weekly slide since July as Russia began retaliating for the downing of a warplane.
Chinese equities slid the most since August and the yuan fell as brokerages revealed they were being investigated for violating rules and data showed industrial profits tumbled. Citic Securities Co. declined 10 percent in Shanghai. The lira has depreciated 3.1 percent against the dollar over five days, while Russia’s ruble is down 2 percent. Turkish shares, which rose on Friday, fell the most worldwide this week as Moscow imposed additional border checks on imports from its seventh-biggest trading partner.
Weighed by prospects for the end of near-zero interest rates in the U.S., emerging-market assets came under further strain this week from increased tension surrounding Syria, the expansion of a graft probe in Brazil and China’s widening anti-corruption campaign as it seeks to assign blame for a $5 trillion summer
“Negative China news always has an impact on emerging-market assets,” Maarten-Jan Bakkum, a senior emerging-markets strategist at NN Investment Partners in The Hague. “Today is typical again: scandals, nervousness about margin financing curbs, and in the background the poor growth picture.”

The MSCI Emerging Markets Index dropped 1.5 percent to 825.52 at 11:23 a.m. in New York, pushing its five-day decline to 2.1 percent. A gauge of 20 developing-nation currencies depreciated for a third day, set for a 1 percent retreat this week. The premium investors demand to own developing-country debt over U.S. Treasuries widening one basis point to 385 on Friday, according to JPMorgan Chase & Co. indexes.

Turkish Outflows

Turkish assets were the worst performers this week as the Borsa Istanbul 100 Index fell 6.3 percent and the lira posted its worst decline since the period ended July 24. Russia imposed more controls on imports from the Black Sea nation, saying 15 percent of goods were found to breach local requirements. The move comes after President Vladimir Putin said the downing of the jet was “a stab in the back.”
While there’s “no sign that the conflict will escalate to a serious level, Turkish tourism will take a big hit and this will be negative for the lira,” said Hertta Alava, who helps oversee about $395 million as the head of emerging markets at FIM Asset Management Ltd. in Helsinki.

Brazil, Russia

The escalating tension also battered Russian assets as the dollar-denominated RTS Index of equities lost 3.6 percent for the week. The decline in government bonds sent five-year yields up 36 basis points in the period to 10.06 percent.
Brazil’s real weakened 1.8 percent in the period, while the Ibovespa slumped 3.9 percent. A widening corruption scandal led to the arrest of a high-profile politician and the billionaire chief executive officer of Grupo BTG Pactual, Latin America’s biggest independent investment bank.
Following a 14 percent slump this year, the MSCI Emerging Markets Index is trading at 11 times projected 12-month earnings, representing a 32 percent discount to the MSCI World Index of developed-country stocks, which has fallen 0.5 percent in 2015.

China Brokerages

Bucking the broader selloff, India’s S&P BSE Sensex Index posted a 1 percent weekly gain amid optimism the government will push economic policies through a parliamentary session that began Thursday. Malaysia’s ringgit rose 0.6 percent this week, the best performance among emerging-market currencies, bolstered by power-asset sale plans from the debt-ridden state-owned 1Malaysia Development Bhd., according to Sim Moh Siong, a foreign-exchange strategist at Bank of Singapore Ltd.
The Shanghai Composite Index slumped 5.5 percent and the Hang Seng China Enterprises Index of mainland companies fell 2.5 percent on Friday. Chinese industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.
Citic Securities, China’s largest brokerage, and Guosen Securities Co. plunged by the daily limit after saying they’re under investigation by the China Securities Regulatory Commission for alleged rule violations.
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Friday, November 27, 2015