EMERGING MARKETS-Emerging assets mostly fall; MSCI move lifts Chinese A-shares, Saudi

By Sujata Rao

LONDON, June 21 (Reuters) - Emerging equities fell for a second day on Wednesday, dragged down by weak oil prices and losses in Asian bourses that could see investment outflows as a result of MSCI (Frankfurt: 3HM.F - news) 's decision to include China in a benchmark share index.

MSCI said its emerging equity benchmark would include 222 China so-called "A" shares from next year, a move that could bring up to $18 billion into the country initially.

The announcement pushed Shanghai and Shenzen markets 0.5 and 1.2 percent higher , while Saudi Arabian stocks, put on the watchlist for eventual inclusion into the index, enjoyed a 2-percent rally

The Saudi market was also boosted by news that Prince Mohammed bin Salman, architect of the kingdom's economic reforms, had been promoted to become crown prince. Investors saw this as reassurance that reforms – including selling a stake in oil firm Saudi Aramco - will continue.

However, MSCI's emerging equity index slipped 0.6 percent as Asian bourses in Hong Kong and Korea lost ground on anticipated selling by investors to make room for China.

The other drag was the oil price fall, with Brent crude down almost 10 percent this month, hitting inflation expectations and potentially forcing the U.S. Federal Reserve to put rate-hike plans on hold. The U.S. bond curve has reacted, pushing spreads between five- and 10-year yields to the narrowest since 2007.

Morgan Stanley (Xetra: 885836 - news) analysts said the backdrop was a mixed one for emerging markets which have taken in new money for seven months in a row.

"The recent decline of oil prices suggests that global funding costs may stay low for longer, keeping yield searching investors pushing funds into EM assets," Morgan Stanley wrote.

"There is one caveat to consider in the short term. Over recent weeks U.S. inflation expectations have fallen faster than nominal yield, pushing U.S. real yields to their highest levels since March. Elevated real yield could provide a risk hiccup, explaining why the equity market traded lower overnight."

Commodity exporters' currencies extended losses, with the rouble down 0.7 percent to 4-1/2 month low against the dollar and the rand falling 0.5 percent.

The Chinese yuan was flat, shrugging off potential MSCI-related inflow, with many feeling that capital outflows from China would eclipse foreign buying.

HSBC analysts said the $18 billion that the market could initially receive was "not large" in the context of China's balance of payments.

"The inflows may also not be enough to offset residents' structural asset diversification outflows, which support our forecasts for a modest yuan depreciation to 6.9 by end-2017 and 7.0 by end-2018," HSBC added.

On the bonds front, Russia successfully placed 10- and 30-year dollar bonds despite extended U.S. sanctions and both issues, sold at par, were holding up well, with the 30-year issue marked higher at 100.85/101.

Sergey Dergachev, senior portfolio manager at Union Investments said the 30-year tranche was attractive, offering a 30-40 basis point premium over the Russian secondary market.

"So far generally there is good appetite for long-end bonds, look at Argentina's 100-year deal," he said, referring to the "century" bond issue on Monday.

For GRAPHIC on emerging market FX performance 2017, see http://tmsnrt.rs/2e7eoml For GRAPHIC on MSCI emerging index performance 2017, see http://tmsnrt.rs/2dZbdP5

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see) Emerging Markets Prices from Reuters Equities Latest Net Chg % Chg % Chg

on year

Morgan Stanley Emrg Mkt Indx 1002.30 -6.37 -0.63 +16.24

Czech Rep 994.31 -3.90 -0.39 +7.89

Poland 2284.66 -18.17 -0.79 +17.29

Hungary 35790.72 -198.97 -0.55 +11.84

Romania 8354.83 -21.67 -0.26 +17.92

Greece 822.07 -4.94 -0.60 +27.72

Russia 973.68 -7.35 -0.75 -15.50

South Africa 44805.60 -164.89 -0.37 +2.06

Turkey 98780.93 -488.34 -0.49 +26.42

China 3156.38 +16.36 +0.52 +1.70

India 31213.64 -83.89 -0.27 +17.23

Currencies Latest Prev Local Local

close currency currency

% change % change

in 2017

Czech Rep 26.29 26.29 +0.01 +2.74

Poland 4.24 4.25 +0.08 +3.79

Hungary 309.09 308.88 -0.07 -0.09

Romania 4.59 4.60 +0.11 -1.20

Serbia 121.64 121.66 +0.02 +1.41

Russia 60.02 59.62 -0.66 +2.08

Kazakhstan 327.06 322.61 -1.36 +2.01

Ukraine 26.02 26.00 -0.08 +3.77

South Africa 13.10 13.05 -0.37 +4.80

Kenya 103.55 103.60 +0.05 -1.14

Israel 3.55 3.54 -0.21 +8.56

Turkey 3.54 3.54 -0.02 -0.46

China 6.83 6.83 -0.01 +1.66

India 64.65 64.54 -0.18 +5.10

Brazil 3.33 3.33 +0.00 -2.20

Mexico 18.24 18.18 -0.31 +13.58

Debt Index Strip Spd Chg %Rtn Index

Sov'gn Debt EMBIG 332 1 .00 7 87.26 1

All data taken from Reuters at 08:34 GMT. Currency percent change calculated from the daily U.S. close at 2130 GMT. (Additional reporting by Karin Strohecker; Editing by Andrew Heavens)