Equities set to gain for the quarter; dollar puts pressure on other currencies

Emerging market equities rose 0.4 per cent on Tuesday and were on track for their first quarterly gain since mid-2014, thanks primarily to robust Chinese markets, though most currencies fell versus the dollar.

The dollar has enjoyed its best quarter since 2008, rising 9 per cent against a basket of currencies and putting pressure on most emerging market assets. However, the prospect of more stimulus has led Chinese equities to rise 16 per cent. The Shanghai index fell 1 per cent on Tuesday, off seven-year highs.

MSCI equity index

The US Federal Reserve is expected to raise interest rates this year, but it has signalled the tightening will be gradual, providing some support to emerging market assets. The MSCI emerging equity index is up 1.7 per cent on the quarter after falling 5 per cent the previous quarter.

UBS strategist Manik Narain said returns were disappointing given the favourable global backdrop, with euro zone money-printing, equity rallies and falling Western bond yields. A basket of 18 emerging market currencies tracked by UBS had lost 4.5 per cent to the dollar so far this year, he said.

“We are ending with very mildly positive returns on stocks and hard currency bonds ... If someone had said Bund yields would be 20 bps and European stocks were up 18 per cent, you would hope for better returns on EM,’’ he said.

“Emerging assets’ inability of EM to rally — despite these tailwinds — is worrying for medium-term investors.’’

Russian dollar-denominated stocks rose half-a-per cent despite weaker oil prices, up 11 per cent on the quarter. The rouble was flat to the dollar.

The Turkish lira slipped 0.3 per cent on the day, shrugging off better-than-expected 2014 growth data.

In central Europe, the Romanian leu was flat against the euro before a central bank meeting expected to deliver a 25- basis-point rate cut, the latest policy easing in the region.

Nigeria president election

Investors were also awaiting the outcome of a presidential election in Nigeria, where stocks rose almost 2 per cent to two-week highs in the previous session, as voting went smoothly and Opposition leader Muhammadu Buhari extended his lead.

Nigerian sovereign Eurobonds were flat, though those of banks such as First Bank, Zenit and Guaranty Trust Bank firmed.

“A convincing outcome could be taken quite positively. With a few exceptions, President Jonathan's stewardship of the economy has not been taken refreshingly, so this would be seen as an opportunity for a fresh start for the country,’’ Jefferies analyst Richard Segal said.

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