EMERGING MARKETS-Election optimism buoys S.Africa, India; emerging stocks set for 2nd week of gains

LONDON Fri May 9, 2014 5:50am EDT

LONDON May 9 (Reuters) - South African bond yields fell to six-month lows on Friday and the rand held near 4-1/2-month highs as markets cheered the outcome of this week's vote while election optimism also drove Indian stocks almost 3 percent higher.

Broader emerging equities were flat, however, after touching two-week highs in the previous session, weighed down by weakness in China, though MSCI's main emerging markets index was heading for its second straight week of gains.

Russian and Ukrainian markets were shut for a Victory Day holiday but risks linger for these markets, given that pro-Russia rebels are set to hold self-rule referendums on May 11, despite the Kremlin's call to delay them.

Elsewhere, however, emerging markets are benefiting from a series of events, including a conciliatory tone on Ukraine from Russian President Vladimir Putin, dovish rhetoric from U.S. Federal Reserve chair Janet Yellen and fairly strong economic data in Europe, the United States and China.

Politics within emerging markets have also helped, with South Africa's ruling ANC party sweeping to victory in elections, handing the government the clout to push through reforms to lift sluggish growth.

The rand pulled back a touch after gaining 1.3 percent on Thursday to 4-1/2 month highs against the dollar, while benchmark bond yields have slipped 20 basis points.

"There was concern about the Economic Freedom Fighters doing particularly well and that would have opened up the ANC to criticism from the far left," said Danat Abdrakhmanov, Institutional portfolio manager at Eaton Vance.

"That was a big risk and that risk has not materialised."

But Abdrakhmanov said investors wanted clarity on government appointments and policy changes post-election before spurring prices higher. Johannesburg stocks fell half a percent

GAINS ELSEWHERE

The South African gains also coincide with rises in other emerging assets - the Turkish lira is just off 4-1/2 month highs to the dollar while in Asia the Philippine peso climbed to a six-month high and the Malaysian ringgit was at one-month peaks.

The Korean won hit a new five-year high before intervention warnings from the finance ministry turned it lower.

Asian currencies are also being helped by hawkish central bank signals, with Korean, Malaysian and Philippine policymakers signalling interest rate rises this week.

India's rupee was at one-month highs and stocks leapt 2.74 percent to new record highs on hopes the opposition would win a majority in elections that conclude next week..

In Europe, Hungary's forint and Poland's zloty stood just off three- and one-month highs respectively versus the euro and 10-year yields in both countries are at mid-2013 lows.

The shadow of the Russian crisis is being felt in the region nevetheless, with Polish retailer LPP posting first quarter losses due to heavy Russian exposure. But LPP shares rose off 10-month lows as losses were less than expected.

On dollar debt, spreads on JPMorgan's EMBI Global index are less than 300 bps over Treasuries for the first time in a year, despite recent selloffs in Russian and Ukrainian bonds.

Data from fund tracker EPFR Global showed emerging bond funds took in new money for the sixth straight week, though equity funds lost money after five weeks of inflows.

Analysts at BNP Paribas said funds had been defensively positioned in emerging markets at the start of the year and many had missed out on the start of the rally in March.

"But they seem to have covered their shorts in April, and are now at a neutral level of risk allocation. This implies the short-squeeze rally in emerging markets is over. However, there is still scope for fund managers to increase their beta - they are not aggressively overweight yet," BNP said in a client note.

For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see ) (Additional reporting by Carolyn Cohn)

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