Brexit triggers surprise emerging market asset rally

Fri Jul 1, 2016 2:37pm EDT
 
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By Dion Rabouin

NEW YORK (Reuters) - When British voters shocked world markets by voting to leave the European Union last week, emerging markets assets seemed among the most vulnerable to a full-on retreat to safe havens from riskier investments.

Yet as investors have realized that the vote and the resulting uncertainty will probably keep the U.S. Federal Reserve on the sidelines at least until December, emerging currencies, stocks and sovereign bonds have stormed higher - outpacing a wider market bounce-back from the initial Brexit rout.

MSCI's emerging equity index is set for its biggest weekly gain since March, while yields on debt denominated in emerging currencies such as rouble and the Brazilian real have fallen as much as 50 basis points over the week. (Graphic:reut.rs/2938RL0)(Graphic:tmsnrt.rs/298pvNd)

"Janet Yellen has made it clear that events outside of the U.S. will have a bearing on the Fed’s decision making and she was explicit about the risk that she thought Brexit would pose," said Viktor Szabo, Senior Investment Manager at Aberdeen Investment Management. "This pause from the Fed is going to support emerging markets."

Latin American currencies have been particularly well bid, with the Brazilian real near its highest level in almost a year, the Chilean peso at a one-month high and the Mexican peso on course for its best four-day streak since early 2010.

Underlining the renewed appetite for emerging market assets, Argentina announced on Thursday an offer of $2.75 billion in bonds, just three months after the country's historic return to the international capital markets.

Brazilian dollar bonds also saw strong investor demand with JPMorgan's index tracking the country's sovereign debt up more than 4 percent since Tuesday while Mexican debt has gained 3.8 percent.

The average yield premium demanded by investors to hold emerging debt over Treasuries has fallen by 30 basis points since Monday.   Continued...

 
A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum.       REUTERS/Reinhard Krause