Sell-off in EM assets overdone: UBS CEO

[ZURICH] The sell-off in emerging-market assets that sent the benchmark equity index to the lowest valuation since the 2008 financial crisis may have gone too far, according to UBS AG chief executive officer Sergio Ermotti.

"What we are seeing right now is a lot of money exiting the emerging markets," Mr Ermotti, the head of Switzerland's biggest bank, said in Zurich on Bloomberg Television's "Countdown". "Short term, it looks a little bit overdone."

Global investors pulled US$6.3 billion from developing-nation equities in the week through Jan 29, the biggest outflow since August 2011, according to Barclays plc, citing data from EPFR Global. The retreat dragged down the MSCI Emerging Markets Index's valuation to 11 times reported earnings, a 40 per cent discount against the MSCI World Index, the widest gap since October 2008, data compiled by Bloomberg shows.

Emerging-market stocks and bonds are tumbling as China's economy slows, weak currencies from Turkey to South Africa spur central banks to raise interest rates and the US Federal Reserve pushes ahead with plans to reduce monetary stimulus.

The MSCI developing-nation gauge has dropped 8.7 per cent this year, extending its worst start since 2009, while a JP Morgan Chase & Co gauge of local-currency debt has lost 0.9 per cent.

The emerging-market stocks measure dropped 1.2 per cent to 915.38 at 9.50am in London yesterday, heading for the lowest close since August, while the MSCI World gauge of developed-nation shares fell 0.6 per cent. Global equities have lost about US$2.9 trillion of market value this year as the sell-off spread from emerging markets to Japan, the US and Europe.

Emerging-market currencies rebounded yesterday, with South Africa's rand gaining 1.2 per cent against the US dollar and Turkey's lira strengthening 1.1 per cent. Both currencies have weakened more than 5 per cent against the greenback this year.

"Like we saw in the last few years, when there are excesses in terms of expectations about one asset class or the other and things move in the wrong direction, you have very violent moves on the other side," said Mr Ermotti, whose bank reported yesterday fourth-quarter profit that beat analysts' estimates.

Some strategists see further losses for emerging markets. Inflation-adjusted interest rates are still too low in developing nations for Citigroup Inc and Goldman Sachs Group Inc to foresee an end to the retreat in currencies.

One-year borrowing costs in Turkey are about 3.3 per cent, less than half of the average in the three years before the 2008 global financial crisis, according to data compiled by Bloomberg.

Mr Ermotti said it's important to differentiate between developing nations when making investment decisions. "Clearly not all emerging markets have the same kind of prospects going forward," he said. - Bloomberg