Chinese stocks, Russian rouble lead H1 emerging asset returns

By Sujata Rao

LONDON (Reuters) - Shanghai shares have provided top-notch returns of 25 percent-plus so far in 2015, despite a 12 percent slump in June, vying with Russian assets and dwarfing the performance of most other emerging markets.

Broader emerging equities were barely in the black on Monday, just before the end of the first half-year, with a likely default by Greece adding to the pressure. Emerging hard currency sovereign and company bonds however have yielded positive returns, the following graphic shows:

http://link.reuters.com/jyq44w

Chinese shares have shrugged off weekend monetary easing which many viewed as reflecting authorities' alarm over flagging growth and have fallen 25 percent in the past 10 days. But Shanghai still looks set to close the first half of 2015 with gains of over 25 percent

http://link.reuters.com/rar44w

Among the first-half equity winners is Russia, up 18 percent in dollar terms amid general cross-asset outperformance after the huge 2014 selloff.

But broader emerging equities are lagging developed peers for the fifth straight year. Most markets, from Brazil to Turkey to Malaysia, are in the red in dollar terms.

"If you took the Chinese rally out, I don't think you'd see a lot of markets that are up this year: Latin America not, India not," said Gary Greenberg, head of emerging markets at Hermes Investment Management.

Analysts, including those at Barclays and JPMorgan, reckon the second half of 2015 will bring better performance, as the U.S. and emerging economies improve.

"We expect markets to worry about Fed lift-off, then rally on the event," JPMorgan said, advising clients to use EM equity weakness as a buying opportunity ahead of a year-end rally.

Greenberg predicted that countries such as India, which are reforming their economies, would benefit once the Fed's first move was past.

"The outlook is really quite a collage of different outlooks. You have got countries that are transforming or trying to, countries that are stuck in the middle, and countries that are going head-on in the wrong direction," he added.

On bonds, local debt has lost more than 5 percent, primarily due to currencies' weakness as the dollar gains momentum from signs the U.S. Federal Reserve will raise rates in September.

But there were some currency winners - the rouble is up 10 percent on the year and 6 percent on the quarter, well ahead of other emerging currencies, as this graphic shows:

http://link.reuters.com/map94w

The worst performers were the Ukrainian hryvnia and Ghanaian cedi, which have lost around 25 percent or more, though the hryvnia firmed 12 percent after a first quarter collapse.

On dollar debt, Russian eurobonds have returned more than 16 percent since January, followed by Argentina with 9 percent returns and Venezuela with about 7 percent.

(http://link.reuters.com/bub37v)

Jim McCormick, head of asset allocation research at Barclays Capital, said the bank was scaling back an emerging bond overweight to neutral though he reckons Fed-related adjustments will have less impact than in 2013, when talk of ending money-printing fuelled an emerging market selloff.

"Real yield in local currency debt relative to developed market debt is near an 8- to 10-year high, and somewhere between 150-200 bps above where we were right before the (2013) taper tantrum," McCormick said.

"It's not a great environment for local currency ... (but) the protection that you are being offered should get you through the worst part of the mess."

(Additional reporting by Karin Strohecker; Graphic by Vincent Flasseur; Editing by Ruth Pitchford)