London - Emerging stocks rose to new 2-1/2 month highs on Tuesday, tracking strong gains on developed equities while the South African rand led emerging currency gains with a 1.2 percent rise against the dollar.
Wall Street's record high on Monday, U.S. Federal Reserve signals that rate hikes are off the agenda for now, a dollar retreat and a sharp recent fall in US bond yields are all buoying appetite for emerging assets.
MSCI's emerging equity index rose half a percent, up for the fourth straight day while many bourses in Asia such as Indonesia and India hit one-year highs . Chinese mainland markets closed 2 percent higher while Hong Kong rose 1 percent .
The average premium investors demand to hold emerging sovereign dollar bonds compared to US Treasuries is at the narrowest in a year, around 380 basis points on the EMBI Global Index .
Cristian Maggio, head of EM strategy at TD Securities, said “a wall of money” was coming back to emerging markets.
Japan is seen adopting more stimulus and the Bank of England may cut interest rates this week to counter the fallout of Britain's June 23 vote in favour of exiting the European Union.
“Easing [by BOE] will be a sign that there is a willingness from major central banks to support growth in the midst of growing uncertainties and that will translate into positive performance for emerging markets,” Maggio said.
“It's liquidity that's being generated elsewhere, part of which will be moving to emerging markets.”
There was also better sentiment in UK markets, with sterling bouncing 1 percent and bonds rallying in response to news Theresa May would be Britain's next prime minister. She has signalled London is in no hurry to start Brexit proceedings.
One of the big beneficiaries was South Africa which has stronger links to the UK than most other emerging markets, with its equity index estimated to carry a roughly 5-percent revenue exposure to the British economy.
The rand has now wiped out all Brexit-triggered losses while bond yields touched seven-month lows and five-year credit default swaps fell to eight-month lows, Markit data showed. Johannesburg stocks rose to one-week highs.
With its bonds yielding over 8 percent, South Africa is also benefiting from investors' hunt for returns. The rouble and lira also firmed around half a percent though bond yields held off recent multi-month lows.
But earlier in the day, Indian government bond yields fell to the lowest in over three years while Indonesian yields touched 16-month lows. Polish yields were at six-month lows.
Average yields on JPMorgan's GBI-EM index of local emerging bonds eased to around 6.3 percent, down 20 bps from levels hit immediately after the referendum.
“With little chance of aggressive dollar appreciation and a more benign outlook for commodities, this implies that we can easily see further outperformance of local currency fixed income assets,” Commerzbank told clients.
“These are longstanding trends and it will take a severe and sudden reappraisal of the outlook for developed market yields to affect a material change.”
The market for new dollar debt has also sprung to life, with Russia's State Transport Leasing Corporation, Kazakhstan's Tengiz and the government of Macedonia all in the market to issue, while Sri Lanka sold a $1.5 billion bond.
REUTERS