Emerging Markets Extend Losses as Concern Over Brexit Resurfaces

(Bloomberg) -- Emerging-market stocks fell for a second day and currencies headed for the longest streak of losses in three weeks as investors switched to haven assets on concern the Brexit contagion is spreading.

The MSCI Emerging Markets Index dropped 1.4 percent to 820 at 1:06 p.m. in London, paring its gains this year to 3.3 percent. A similar gauge of currencies slid for a third day after Bank of England Governor Mark Carney said Tuesday the risks from Britain's decision to leave the European Union have started to crystallize.

On Wednesday:

• Chinese shares traded in Hong Kong posted the biggest two-day retreat since June 13
• Polish and South African equity benchmarks dropped at least 1.5 percent
• Russia's ruble weakened with oil
• Indonesia's Eurobonds fell, sending yields up by the most in almost seven weeks
  
• Many markets in Asia and the Middle East were closed for Eid holiday

Three asset managers froze withdrawals from real estate funds as expectations that U.K. property values could plunge 20 percent in the next three years led to a rush for redemptions. Their action evoked memories of the 2008 financial crisis, pushing investors to park funds in safer assets such as gold, and ending a post-Brexit rally in emerging markets fueled by bets the Federal Reserve will further delay interest-rate increases.

“The aftershocks of the Brexit vote are being felt,” said Julian Mayo, who helps oversee $2 billion as co-chief investment officer at Charlemagne Capital Ltd. in London. “The suspension of redemptions in the three property funds has led to the perception that risk is being taken off the table.”

Stocks

Equities in the developing world are beating advanced-nation peers by the most in seven years. That outperformance will continue as the outlook for growth picks up while political risks from the U.S. to the U.K. escalate, according to Mayo. He favors Indian and Brazilian stocks on grounds they may benefit from a revival in the consumer economy.

The Hong Kong Stock Exchange Hang Seng China Enterprises Index slid 1.6 percent, for a two-day loss of 3.4 percent.

Poland's benchmark index headed for the lowest close since January as the new central bank governor left borrowing costs unchanged, preferring to maintain the status quo amid risks related to Brexit. In South Africa, the FTSE/JSE Africa All Shares Index dropped 1.7 percent.

The MSCI gauge trades at 11.8 times the projected earnings of its constituents, a 25 percent discount to the valuation of advanced-nation shares. All 10 industry groups on the measure retreated on Wednesday, with the biggest losses seen in technology companies.

Currencies

The MSCI Emerging Markets Currency Index declined 0.4 percent as its 30-day volatility climbed to the highest level since April. South Korea's won led losses and South Africa's rand, the world's most volatile currency, weakened for a third day.

The ruble slid 0.7 percent to 64.75 per dollar as Brent oil traded 1.5 percent lower at $47.23 a barrel. Poland's zloty extended losses against the euro after the rate decision.

Bonds

Russia's government bonds dropped for a third day, sending the yield on five-year notes seven basis points higher to 8.79 percent, as the Finance Ministry sold bonds.

The rate on Indonesia's dollar-denominated bonds due 2026 increased 14 basis points to 3.54 percent.

The premium investors demand to own emerging-market debt rather than U.S. Treasuries widened for a second day, increasing three basis points to 388, according to JPMorgan Chase & Co. indexes.

To contact the reporter on this story: Srinivasan Sivabalan in London at ssivabalan@bloomberg.net. To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net, Srinivasan Sivabalan, Stephen Kirkland