Emerging Markets Flash a Growth Warning Sign

The fallout from the deadly coronavirus is battering emerging markets, a sign of skepticism that the world economy can easily bounce back from its worst year in a decade.

After weeks of hoping that a trade detente would buoy the global economy, investors have retreated from wagers on commodities and emerging markets dependent on Chinese consumption. In the eight trading days through Wednesday, the industrial metal copper slid more than 10% and Brent crude, the global gauge of oil prices, fell almost 7.5%.

Lower materials prices threaten growth in producing nations such as Chile and Brazil, and the currencies of those and other emerging markets have fared poorly to start 2020. If needed, the Organization of the Petroleum Exporting Countries and allies including Russia are considering deepening output cuts to boost oil prices.

Emerging-market stocks have also taken a beating on fresh growth concerns, upending an advance that began in mid- October. Making matters worse: The dollar has rebounded recently with traders favoring assets more closely tied to the U.S. economy.

A stronger dollar makes investments denominated in the U.S. currency more expensive to foreign buyers. It also makes it more costly for developing countries to service dollar-denominated debt.

Despite concerns that the volatility hitting emerging markets will spread, U.S. stocks remain near all-time highs. The recent gap in performance is the latest example of low interest rates and sturdy consumer spending pushing major U.S. indexes ahead of the rest of the world.

It also underscores the risk of investors piling into countries that have attractive long-term growth prospects, only for them to quickly change direction when sentiment shifts.

"The market doesn't really believe in a global-growth story anymore -- it believes in the central-bank prop-up," said Christopher Stanton, chief investment officer of Sunrise Capital Partners. Mr. Stanton said he hasn't held positions in emerging markets in the past few years given trade concerns and questions about Chinese growth.

Following a 1% rebound Tuesday and modest Wednesday decline, the S&P 500 is up 24% in the past year and has marched steadily higher for most of that stretch. By contrast, an index tracking emerging-markets stocks is only up about 6.5% during that span.

Fears of an international slowdown have driven big swings in emerging markets in the past few years, in large part because of their reliance on Chinese consumption. That demand for a wide range of products and raw materials is now at least temporarily expected to soften with the Chinese government trying to contain the pneumonia-causing coronavirus.

In a sign of how quickly investor optimism about global growth has faded, copper logged its worst 10-day stretch since October 2011 in the period ended Wednesday. A chunk of the declines for the metal, which is vital to manufacturing and construction, came after the number of those infected and killed by coronavirus soared over the weekend.

"The number really shocked people," said Lucy Qiu, emerging-markets strategist at UBS Global Wealth Management. " There's a big fear factor." The firm is still maintaining a larger position in emerging-market stocks than the benchmark it tracks, wagering that the hit to economic growth in Asia will prove short-lived.

The latest volatility comes after investors had favored emerging markets for weeks, leaving them vulnerable to a reversal, analysts say. Money had flowed into emerging-market stock funds in 13 consecutive weeks through Jan. 22; billions of dollars also went into funds tracking emerging-market debt, according to figures from EPFR Global.

At the same time, speculative investors had ramped up bets on gains in copper and oil. They recently pushed net bets on higher prices of Brent crude to their highest level since October 2018.

Such crowding worries traders. When sentiment shifts suddenly, the market's swings can get magnified as investors try to limit their losses by changing their positions at the same time.

"There was this consensus trade that everything was fine, that everything was solved," said Marwan Younes, chief investment officer of macro-focused hedge fund Massar Capital Management. "Positioning was excessive."

Mr. Younes said his firm was pessimistic about industrial metals earlier in the month and expects more volatility as traders weigh signals about the Democratic primaries and U.S. presidential election.

The sudden reversal in raw materials is also a setback for U.S. producers. Shares of copper miner Freeport-McMoRan Inc. are down 14% this month alone. Exxon Mobil Corp. shares have tumbled to their lowest level since 2010 ahead of the company's Friday earnings report.

Their slides come after a run-up in the riskiest parts of the market had fueled worries that the rally had gone too far. The coronavirus was the trigger for a reversal, but some investors had been calling for the advance to pause for weeks.

"You saw how fast and how quickly they all ran," said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. "It didn't really need to take much in order to spook the market."

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Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

  (END) Dow Jones Newswires
  01-30-20 0814ET
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