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Emerging-Market Stocks Rally to Record on Commodities (Update1)

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Fortune_Cookie   Thursday, 12/07/06 08:24:22 PM
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Emerging-Market Stocks Rally to Record on Commodities (Update1)

By Michael Tsang

Dec. 5 (Bloomberg) -- Emerging-market stocks rose to an all-time high after faster economic growth, a boom in commodities demand and the prospect of lower U.S. interest rates spurred investment in developing countries from Asia to Latin America.

Benchmarks in Russia, India and Indonesia climbed to records and the so-called H share index of Hong Kong-listed Chinese stocks also set an all-time high. OAO Gazprom, the world's largest natural gas producer, and China Mobile Ltd., the biggest mobile-phone company by users, led the rally.

The Morgan Stanley Capital International Emerging Markets Index, which tracks 25 developing markets, added 1 percent to 888.39. The advance helped the measure eclipse its record of 881.52 reached on May 8.

The index has recovered all its losses since plummeting 25 percent from the record through June 13 as investors regained confidence in the growth potential of developing markets.

``This is where you have to be in the long term,'' said Cliff Quisenberry, who runs the $683 million Eaton Vance Tax- Managed Emerging Markets Fund. The climb in the emerging markets index since its June 13 low is almost double the 18 percent advance in the MSCI index for developed markets.

Expansions in China and India, the world's two fastest- growing major economies, have underpinned demand from commodity producers such as Russia and Brazil. Faster economic growth from exports and investment has also bolstered spending on homes, cell-phones and cars as incomes increase.

Latin America Leads

The Latin American index has jumped the most of any region in the period, climbing 45 percent, led by Brazil and Mexico, its two biggest markets by value. Gains in the region accelerated after voters re-elected President Luiz Inacio Lula da Silva in Brazil and chose Felipe Calderon, who supported free trade and limits on government spending, to lead Mexico.

The MSCI measure for eastern Europe, Africa and the Middle East, or EMEA, has gained 31 percent, while the index for emerging markets in Asia also climbed 31 percent.

Investors have taken renewed interest. Funds that invest in shares of developing countries have garnered more money than they have lost for eight straight weeks, according to Emerging Portfolio Fund Research, a Boston-based fund research company.

The buying spree has brought the total to $19.3 billion for the year, on a net basis. Net inflows to emerging-market stock funds had reached $32.9 billion before the sell-off between May and June caused investors to pull out as much as $18 billion.

The 25 percent drop in 26 days in the MSCI emerging markets index in May and June was precipitated by concern higher interest rates worldwide would lessen the appeal of riskier assets.

Russian Record

Today, Russia's dollar-denominated RTS Index gained 1.7 percent to 1821.33, setting a record for a fourth day. The index, which gets more than half of its value from energy companies, has surged 45 percent since July 13 and 62 percent this year.

Gazprom gained 1.3 percent. OAO Surgutneftegaz, Russia's fourth-largest oil company, jumped 6.9 percent to $1.485.

Crude-oil futures for January delivery yesterday touched $63.82 yesterday, the highest since Sept. 28. Russia, the world's second-largest oil supplier, after Saudi Arabia, relies on oil and gas sales for about 75 percent of its export revenue.

Higher prices for metals boosted shares of Brazil's Cia. Vale do Rio Doce, the world's second-largest mining company. The stock rose 3.5 percent to 54.1 reais.

Nickel rose to the highest in 19 years in London, lead climbed to a record and aluminum increased to a six-month high. Copper advanced to a three-week high in New York.

Buying Spree

Commodity exports have boosted tax revenue in Brazil, helping it pay down $16 billion of foreign currency debt and lifted international reserves to a record $83 billion.

Net buying in Latin American stock funds equaled for 24 percent of their total assets this year, the highest percentage of any emerging market region, according to Brad Durham, a managing director at Emerging Portfolio Fund Research.

The inflows have helped to lift Brazil's Bovespa index 39 percent this year, in dollar terms.

Gains in China have been among the best in emerging markets this year, as the market didn't fall as much during the global sell-off. The Hang Seng China Enterprises Index, which tracks the H shares of Hong Kong-listed mainland companies, has surged 64 percent in dollar terms and today closed at 8758.17, the highest since its introduction in August 1994.

The Shanghai and Shenzhen 300 Index, which tracks yuan- denominated A shares listed on China's two exchanges that most foreign investors are restricted from buying, is up 94 percent.

China's economy, the world's fourth largest, may expand as much as 10.7 percent in 2006, the government said. October retail sales jumped at the fastest pace in almost two years.

Yuan, Share Sales

Share sales have made Chinese companies more accessible to overseas investors. In October, Industrial & Commercial Bank of China Ltd. raised $19.1 billion in the world's biggest initial public offering, attracting orders equal to twice Citigroup Inc.'s market value.

Today, China Mobile gained 0.7 percent to HK$63.75. The yuan rose 0.07 percent to 7.8220 against the dollar, the strongest close since China ended a fixed exchange rate last year. Hong Kong's currency is pegged to the dollar.

A strengthening Chinese currency boosts returns on yuan- related assets for dollar-based investors and lowers the cost of dollar-denominated debt and expenses for Chinese companies.

The market is well-supported ``mainly due to the yuan factor,'' said Teresa Chow, who helps manage $500 million at RBC Investment Management Asia in Hong Kong.

China Telecom Corp., the nation's biggest fixed-line telephone company, surged 16 percent to a record HK$4.01 after a company official said the government will soon issue licenses for high-speed third-generation wireless networks.

Still Cheap?

Growth prospects in developing countries help to bolster profit expectations. Companies in the MSCI emerging markets are valued at 14.8 times estimated earnings, compared with 15.7 times for shares in developed markets.

In India, the Bombay Stock Exchange's Sensitive Index, or Sensex, has climbed 53 percent since June 13. It rose 0.5 percent to close at an all-time high of 13,937.65 today.

Infosys Technologies Ltd., India's second-biggest software company, gained 1.5 percent to 2,239.05 rupees. Reliance Industries Ltd., the country's biggest non-state run company, added 1.6 percent to 1279.55 rupees. In October, both companies reported quarterly profits that beat analysts' estimates.

India's $775 billion economy grew 9.2 percent in the third quarter, beating economists' estimates.

Growth has been bolstered by the fastest wage increases in Asia last year resulting in the nation's biggest expansion in the services industry in more than two years.

``The economy is chugging along very well,'' said Soumendra Nath Lahiri, who helps manage about $2 billion in Indian equities at DSP Merrill Lynch Fund Managers Ltd. in Mumbai.

To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net .

Last Updated: December 5, 2006 21:26 EST

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