Emerging Market Stocks Head for Worst Drop in Two Decades

By Denis Maternovsky and William Mauldin

Oct. 6 (Bloomberg) -- Emerging market stocks headed for the biggest drop in at least two decades and exchanges in Russia and Brazil were forced to halt trading as the global banking crisis escalated in Europe and oil fell below $90 a barrel.

Brazil's Bovespa index tumbled 10 percent, while Russia's Micex Index plunged 18 percent before trading was halted for a second time today. Indonesia and Saudi Arabia lost the most in at least six years. The MSCI Emerging Markets Index slumped 8.2 percent, leaving it poised for the biggest slide ever.

Brazil's two largest companies, Cia. Vale do Rio Doce and Petroleo Brasileiro SA, declined more than 10 percent on concern demand for metals and fuel will weaken. Financial shares tumbled worldwide as BNP Paribas SA agreed to take control of Fortis after a government rescue failed, and German state and financial institutions put together a 50 billion-euro ($68 billion) rescue package for Hypo Real Estate Holding AG.

Russian authorities grappling with the worst financial turmoil since the government's debt default in 1998 have pledged more than $150 billion for banks and companies through loans and tax benefits.

``If people have limited confidence in these several- hundred-year-old banking institutions, then maybe it's no surprise they don't have confidence in the Russian market,'' said Mattias Westman, who helps manage about $5 billion in European emerging markets at Prosperity Capital Management in London. ``I'm sure there will be some casualties.''

Russia's stock market decline along with China and Brazil has pushed the benchmark MSCI emerging market gauge down 44 percent this year, the steepest drop in at least two decades. Stocks included in the index are valued at 10.1 times earnings, the cheapest since 1998, data compiled by Bloomberg show.

Russian Banks

Investors pulled almost $60 billion out of Russia in the seven weeks after Aug. 8, according to BNP Paribas, as the war in Georgia, falling oil prices and the seizure in international capital markets drove down equities.

The Finance Ministry pledged $44 billion for OAO Sberbank, VTB Group and OAO Gazprombank, Russia's three biggest banks, on Sept. 17 on the understanding that the funds would be used to end a seizure in money markets after rates soared to a record 11.1 percent.

Sberbank, Russia's biggest bank, dropped as much as 22 percent, and OAO Gazprom, the country's biggest company and its gas export monopoly, fell 19 percent today.

``Dealing with the crisis will remain out of the hands of the domestic authorities,'' said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. ``This just goes to show how fragile sentiment is.''

Russia's Micex index was down 16.7 percent at 770.21, its lowest level since October 2005, before trading was halted for the second time.

Margin Calls

Russian stocks are suffering bigger losses than other emerging markets partly because investors bought their shares with borrowed money and are now facing payment demands, or margin calls, said Aivaras Abromavicius, a fund manager at East Capital in Moscow.

``We are seeing a terrible meltdown in share prices as investors try to guess which company will be the next to have key shareholders facing margin calls,'' said Abromavicius, who helps manage $4.5 billion of assets. ``There is a higher likelihood of margin calls in Russia than anywhere else. For anyone who has pledged shares in exchange for a loan, there is concern that the bank could take possession and dump them on the market.''

The ruble fell for an eighth day to its weakest level in 18 months against the dollar at 26.2043.

`Vulnerable'

Russia's economy is ``vulnerable'' as the credit crisis worsens, with retailers and developers the most at risk, said Andrei Sharonov, managing director at Troika Dialog, Russia's oldest investment bank.

``This problem is not only for financial institutions, but for the whole of industry, for the whole economy,'' Sharonov, a former deputy economy minister, said in a Bloomberg Television interview in Moscow today. ``Many companies feel these problems with debt financing.''

Stocks tumbled in Europe and Asia and U.S. index futures dropped, while Treasuries advanced.

The extra yield investors demand to own developing-nation bonds instead of U.S. Treasuries widened 20 basis points to 4.58 percentage points, a four-year high, according to JPMorgan Chase & Co.'s EMBI+ Index.

Crude oil dropped below $90 a barrel in New York for the first time since February on concern that slowing global economic growth will reduce demand for fuel.

Saudi Arabia's Tadawul All Share Index, which was closed since Sept. 28, fell the most in at least 14 years, losing 9.8 percent. Indonesia's Jakarta Composite Index dropped 10 percent to 1,648.74, the biggest loss since the 2002 terrorist attack, on the first day of trading after a four-day holiday.

China, India

China's benchmark CSI 300 Index slid 5.1 percent, its biggest one-day decline since August, after resuming trading today after a week-long holiday. The index has lost 60 percent this year, the world's second-worst performer, on concern the global credit crisis and the Chinese government's measures to tame inflation will slow economic growth.

The Bombay Stock Exchange's Sensitive Index, or Sensex, fell 5.8 percent to 11,801.70, its lowest since September 2006. ICICI Bank Ltd., India's second-biggest lender, fell 2.4 percent and Bank of China Ltd., the country's oldest financial institution, dropped 4.9 percent.

``In this environment, no one wants to buy because things are spiraling downward globally,'' said Ronald Smith, chief strategist at Alfa Bank in Moscow.

Turkey's benchmark index fell 7.9 percent, its biggest decline since May 2006.

Default Swaps

The cost of protecting bonds sold by Russia's government jumped the most in three weeks, rising 26 basis points to 290, according to CMA Datavision in London. Credit default swaps on Ukrainian government debt soared 57 basis points to 900, the highest among Europe's emerging markets, CMA prices show.

Credit-default swaps on Turkey rose 42 basis points to 354, Indonesia surged 78 basis points to 512 and South Korea rose 37 to 266, CMA prices show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net