EMERGING MARKETS-Emerging stocks set for fourth week of gains; politics a constraint

Fri May 23, 2014 6:53am EDT

(There will be no London-based emerging market report on Monday, May 26 due to a UK public holiday)

By Sujata Rao

LONDON May 23 (Reuters) - Emerging equities headed for a fourth straight week of gains on Friday, supported by optimism over world growth though fears of election-related unrest in Ukraine held the market near 6-1/2 month highs.

MSCI's emerging equity index was flat and is about 10 percent off levels it was at when a May 22 2013 speech by ex-Federal Reserve boss Ben Bernanke set off a tidal wave of selling by warning of a reduction in U.S. money-printing.

Hard currency emerging debt too is trading at yield spreads of around 302 basis points over U.S. Treasuries compared to around 288 bps at the time of Bernanke's speech. But some assets such as the Indian rupee and stocks have surpassed year-ago levels on renewed hope of structural reform.

Indian stocks rose 1 percent and are on track for their best monthly performance since January 2012. The rupee is trading just off 11-month highs at 58.4 per dollar.

Firmer recent Chinese data and clear signs of economic recovery in Europe and the United States is helping sentiment while U.S. bond yields have fallen from early-2014 levels.

"We believe we are in an environment where flows can drive the price action higher. The real money in EM is already entering overweight category, but the overweight is not extreme yet," said Luis Costa, head of CEEMEA FX and debt at Citi.

Data from EPFR Global bore that out, with emerging stock and bonds funds taking in $1.5 billion in the past week.

"If you look at returns over the last two months, that could help sentiment. (But) we would be careful on some of the currencies, some of the bond curves," Costa added.

Barclays analysts saw U.S. yields and policy mistakes within emerging markets as possible risks.

"We think EM spreads will continue to tighten. However, based on our view that U.S. Treasury rates will increase...in the second half, we expect a relatively muted outlook for EM credit returns for the remainder of the year," they said.

Local currency debt may have further to rally. Yields on the GBI-EM index are around 6.8 percent versus 5.5 percent before the tapering speech. Hungarian yields approached record lows after the central bank signalled more rate cuts.

Turkish yields hit new six-month lows after the central bank surprised markets on Thursday by easing policy.

POLITICS

Political risk is also a concern as Ukraine and Egypt gear up for elections and Thailand suffered another military coup.

Russian stocks and the rouble pulled back from multi-month highs ahead Sunday's election in Ukraine, where violence has flared again in the turbulent eastern provinces. Though the Kremlin has softened its stance, the West has threatened harsh sanctions if Russia disrupts the election

"Investors are keen to close their long positions ahead of the election in Ukraine," Geldy Soyunov, a senior analyst at Alfa Bank in Moscow, said.

Earlier in Asia, Thai stocks came under heavy selling pressure, falling to two-week lows a day after the army chief seized control of the government in a coup.

And while Cairo markets were shut, the pound has plumbed record lows on lack of foreign investment inflows.

Costa of Citi however reckons the expected election win for Abdel Fattah al-Sisi will not immediately bring back investors.

"I do not think Sisi is likely to make changes on a massive scale. Investors would prefer to go to Nigeria, East Africa, Serbia before Egypt," he added.

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 ) (Editing by Toby Chopra)

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