Emerging Markets News Monitor
Emerging Markets News Monitor
EM Stocks Popping, Iran-Israel Conflict and Oil Prices, China Dominates MSCI as Shares Rise, ADNOC Buys Covestro for $13B, MercadoLibre Soars Higher
The Top Stories Shaping Emerging Markets - October 2
Emerging Market Stocks Have Popped. Expect More Outperformance.
Barron’s
“Emerging market stocks are on the move—finally—and look ready to continue their outperformance versus U.S. stocks.”
“The iShares MSCI Emerging Markets exchange-traded fund is up 11% to just over $46 from its Sept. 6 low, beating the S&P 500 index’s 6% return over the same period.”
“Since that low, the Federal Reserve cut interest rates to keep U.S. economic growth humming, and China initiated a series of moves to boost its economy, including reducing the amount of cash banks need to have in reserve and lowering mortgage rates for existing homeowners. Together, they will support the Chinese economy—and Chinese stocks, which represent a quarter of the market value of the Emerging Markets ETF. The major Chinese stock indexes have led the gains for the fund.”
“…emerging market stocks are still cheap. The iShares ETF trades at 12.6 times expected earnings for the coming 12 months, 42% lower than the S&P 500’s 21.6 times. And while U.S. investors fret about valuations, EM multiples are unlikely to move much lower.”
“Earnings, meanwhile, should hold. Emerging market revenues are forecast to grow at an 8% clip over the coming two years, about two points faster than projected in the U.S. If profit margins can improve as well, that would provide a big boost to EM stocks, especially if U.S. margins were to slip.” Jacob Sonenshine reports.
Why the Iran-Israel Conflict Has Raised Oil Prices Only Modestly
The New York Times
“…Brent crude, the international benchmark, rose to nearly $76 a barrel on Wednesday, extending gains from the previous day. Before the missile attack, oil was trading at just above $71 a barrel.”
“The intensifying fighting between Israel and Iran and its proxies, especially Hezbollah in Lebanon, is increasing fears about the oil market, but so far those worries are still being outweighed by factors like weak demand in China and increased oil production in the United States and elsewhere.”
“Traders are also aware that after a year of conflict in the Middle East, there has been little disruption to supplies. Oil prices had been falling steadily in recent months, from above $90 a barrel earlier in the year.”
“But the threat is growing. Israel, for instance, could attack Iran’s main oil export terminal on Kharg Island in the Persian Gulf, with the aim of denying the country oil revenue…Sanctions limit Iran’s production and restrict sales to countries like China. Still, the loss of Iranian supplies would have an effect.” Stanley Reed reports.
China Dominating Emerging Markets Again as MSCI Weighting Soars
Bloomberg
“In just eight days, China regained the influence it lost over 10 months in emerging markets.”
“The country’s weight in MSCI Inc.’s benchmark for EM equities climbed back to 27.8% at the end of September, the highest level since November 2023, before the country’s markets closed for a long holiday on Tuesday, according to data compiled by Bloomberg based on the gauge’s shares listed on mainland, Hong Kong and overseas markets.”
“The increase in China’s weighting was powered by a $3.2 trillion rally in its stocks since Sept. 18, when the Federal Reserve gave a green light to global monetary easing and China followed up with a stimulus bazooka. The stunning turnaround ends a phase in which Chinese stocks were the laggard in emerging markets, losing share in index weights month after month as rival markets such as India, Taiwan and South Korea surged ahead.”
“Amid deepening outflows and an underperformance that took China to a record low versus the rest of EM, global money managers increasingly started reducing exposure to the country. From Morgan Stanley to HSBC Holdings Plc and Pictet Asset Management, the ranks of China skeptics swelled. Amid the gloom, though, a small band of investors remained faithful to bullish China calls — touting the possibility of greater stimulus as well as cheap valuations. The past few days seem to have validated them.”
“…China’s charge back into the top of the emerging-market leaderboard has been led by mainland stocks, with the benchmark CSI 300 Index soaring 27% since the Fed rate cut. That helped the country beat other emerging markets last month by the most since June 2022.”
“…China’s improving fortunes are having other impacts on emerging markets, underscoring the country’s importance to the overall asset class. South Africa’s equity markets completed seven successive months of gains, their longest streak since May 2021, partly on optimism that Chinese stimulus will help drive demand for the country’s exports to the world’s second-biggest economy.” Srinivasan Sivabalan reports.
Abu Dhabi’s ADNOC to Buy Covestro for $13 Billion
Wall Street Journal
“An oil producer from the United Arab Emirates has clinched a $13 billion-plus deal for Germany’s Covestro, a big bet on chemicals as part of its effort to transform into a fully integrated energy company akin to Exxon Mobil and other U.S. majors.”
“Abu Dhabi National Oil Co., or Adnoc, agreed Tuesday to the tie-up, bringing an end to more than a year of talks that had been extended by protracted negotiations over price, job protections for Covestro employees and other matters.”
“The takeover gives Covestro a market value of about 11.7 billion euros, equivalent to about $13.1 billion, making this one of the year’s largest deals. Adnoc is paying 62 euros a share, consistent with the price the energy giant had previously indicated that it was considering.”
“…Earlier this year, Adnoc acquired an almost 25% stake in European energy company OMV to accelerate the expansion of its chemicals business. But a bid for a controlling stake in Brazilian petrochemical producer Braskem collapsed in May.”
“Covestro is one of the world’s biggest producers of polymer materials that are used across industries ranging from the automotive sector to healthcare. The materials are integral to the development of coatings, adhesives, and plastics, among other products. The company operates close to 50 production sites globally and employs almost 18,000, according to its website.” Ben Dummett reports.
MercadoLibre Continues to Soar, Becoming Lat-Am’s Most Valuable Company
Reuters
“When Wagner Dias and his wife Mariana needed a loan to grow their children's clothes business, the Brazilian entrepreneurs turned to Argentina's MercadoLibre Inc, the online platform they use to sell their products.”
“MercadoLibre, which is making a push into an increasingly crowded regional fintech and credit market, already had the data it needed to green-light the loan. The Amazon.com of Latin America has used innovations like that to cement its status as the region's most valuable firm with a market capitalization exceeding $100 billion.”
“MercadoLibre, which has overtaken Brazilian state energy giant Petrobras this year as Latin America's most valuable company, is finding new ways to serve Dias and others in its online ‘ecosystem’ to lock in shoppers and sellers. Its new offerings, ranging from credit to movies, have helped fuel its rapid expansion.”
“…MercadoLibre is the dominant e-commerce player in Latin America, weathering aggressive pushes by Amazon and others. But on fintech it still lags behind pure digital finance rivals such as Brazil's Nubank, though it is ahead of Argentina's Uala. It wants to replicate the crossover success of Chinese online marketplace Alibaba, whose Alipay wallet is among the top players in the world's second largest economy.”
“Investors are bullish on the company's outlook. The stock is currently at $2,100, and in September, Morgan Stanley hiked its target price on the shares to $2,500 from $2,175. Also in September, JPMorgan signed a $250 million financing deal to expand MercadoLibre's fintech business in Mexico.” Reuters reports.
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