By Lynn Thomasson and Michael Patterson
May 19 (Bloomberg) -- Stocks in developing countries advanced for a sixth day, erasing the MSCI Emerging Markets Index's 2008 loss, as record-breaking rallies in oil, coal and soybeans boosted equities from Rio de Janeiro to Moscow.
Gerdau SA, PT Bumi Resources and OAO Lukoil led the rebound as rising global demand and the falling dollar pushed oil above $127 a barrel. Stocks in Brazil, Taiwan and Russia propelled the index, which lost as much as 16 percent this year, to within 7.4 percentage points of a record.
``As long as we're seeing strong commodity prices, the implication is that the emerging markets are still growing,'' said Walter ``Bucky'' Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. ``The supply constraints in commodities are here for at least several more years, so these stocks should continue to do well.''
The worst start for global equities since 2001 has given way to the steepest recovery in four years as the Federal Reserve's bailout of U.S. banks and the surge in commodity companies restored investor confidence in stocks.
MSCI's Emerging Markets Index rebounded almost 20 percent from its 2008 low. The Standard & Poor's 500 Index, which fell as much as 13 percent, is within 3 percent of its level on Dec. 31, as is the U.K.'s FTSE 100 Index. The MSCI World Index, which tumbled 9.5 percent last quarter, rallied 13 percent since March 17. The biggest two-month gain since June 2003 left the measure 1.9 percent lower than at the end of 2007.
Index Quadruples
The MSCI Emerging Markets Index added as much as 0.5 percent to 1,245.98 today. The index, which ended 2007 at 1,245.59, has quadrupled in the past five years. On average, companies in the measure trade for 15.9 times earnings, 21 percent higher than the monthly average since the start of 2002.
The gauge of stocks in countries from Mexico to Israel and Korea dropped as much as 22 percent from its Oct. 29 peak as increasing bank losses and tightening credit standards threatened to slow economic expansion worldwide. Energy and raw-material producers gained 33 percent and 36 percent since the Jan. 22 low.
Gerdau, Latin America's largest steelmaker, has risen 54 percent this year. The Brazilian Steel Institute said last week that domestic demand will climb at almost twice the worldwide pace as carmakers and construction companies expand production. Porto Alegre, Brazil-based Gerdau added 9 percent last week, its third-straight weekly advance. The stock now trades for 26.4 times Gerdau's earnings, 40 percent higher than at the start of the year.
Prices Double
Bumi, Asia's biggest exporter of power-station coal, rallied 41 percent in 2008. The shares are at the highest in the company's 17-year trading history after Reuters reported the Jakarta-based company will sell coal to some Japanese utilities at more than double the 2007 price, citing Dileep Srivastava, Bumi's head of investor relations. Bumi's price-to-earnings ratio has almost doubled to 21.1 since its low in January.
Lukoil, Russia's second-biggest oil producer, is up 28 percent this year. The Moscow-based company added 13 percent last week after Prime Minister Vladimir Putin said a plan for oil industry tax cuts is ready for Parliament.
Capital International Inc., a unit of Los Angeles-based asset manager Capital Group Cos., raised $2.25 billion for private-equity investments in emerging-markets, according to a statement today. That's four times the size of its prior fund.
U.S. financial stocks jumped 12 percent in the past two months as the Fed's fastest interest rate cuts in two decades and support for the rescue of Bear Stearns Cos. helped banking companies battered by $343 billion of losses and writedowns from subprime-contaminated securities.
Fearing The End
``Two months ago, you had the capital markets fearing the world was coming to an end,'' said Michael Strauss, the Wilton, Connecticut-based chief economist and market strategist at Commonfund, which oversees about $43 billion. ``By April, you could clearly argue that the Fed not only gets it, but they're doing creative things to address it. We're not getting that type of nasty recession that the markets were priced to.''
While the market capitalization of the 1,933 companies in the MSCI World Index is down about $712 billion in 2008, the losses narrowed from $4.49 trillion in March.
Valuations rose as investors bet profits will increase. The S&P 500 trades at 23.8 times the reported earnings of companies in the index, the highest since December 2003, according to data compiled by Bloomberg. Price-to-earnings ratios of the FTSE 100 and MSCI World indexes rose more than 15 percent since January.
`Riskier, More Cyclical'
``Money has been flowing back into riskier, more cyclical stocks and sectors really since the Bear Stearns bailout'' on March 16, said David Chalupnik, a Minneapolis-based senior managing director at First American Funds, which oversees about $62 billion. ``We're focused on trying to take advantage of that.''
Companies in the S&P 500 that rely on consumers' disposable income, including retailers and automakers, topped analysts' first-quarter earnings estimates by 11 percent, the widest margin of 10 industry groups, according to Bloomberg data.
Energy and raw-materials companies led the rally in global stocks since March as crude oil surpassed $120 a barrel and steel-sheet prices in America rose to a record $850 a ton.
U.S. Steel Corp., the Pittsburgh-based company that's the second-largest U.S. steelmaker by market value, rallied 75 percent since the S&P 500's low on March 10. Melbourne-based BHP Billiton Ltd., the world's largest mining company, surged 48 percent in London trading since the FTSE 100 bottomed March 17. Rio de Janeiro-based Cia. Vale do Rio Doce, the biggest iron-ore producer, gained 26 percent.
Energy, Materials
Brazil's Bovespa index advanced 13.9 percent this year, the best performance among benchmarks in the 20 biggest equity markets, according to Bloomberg data. Energy and raw-materials stocks account for more than 60 percent of the Brazilian market's value.
The U.S. currency's slump has enhanced returns. The Bovespa rose 24 percent in dollar terms, according to Bloomberg data.
Russia's ruble-denominated Micex index jumped 24 percent since falling to its 2008 low on Feb. 8. Lukoil lead the rebound.
MSCI's Asian index rose 17 percent from this year's low on Jan. 22 and is 2 percent away from erasing its 2008 loss. Taiwan's Taiex index has risen 9.3 percent this year, the region's best performance, on optimism Ma Ying-jeou, to be sworn in as the island's president tomorrow, will forge closer ties with China and boost domestic spending.
Oil companies' $70 billion income in the last two quarters skewed profits in the S&P 500 index. Earnings would have tumbled 26 percent and 30.2 percent without their contribution, the biggest decreases since at least 1998.
`Bear Market Rally'
``This is a bear market rally,'' said Gregor Smith, a London-based fund manager at Daiwa Asset Management who helps oversee $1 billion. ``The economic fundamentals don't really support where the markets are at the moment.''
U.K. house prices posted the first annual decline since 1996 last month, while single-family home construction in the U.S. fell to a 17-year low.
The MSCI World Index dropped in the first quarter after banks from Citigroup Inc. to UBS AG posted record losses and speculation increased that the world's biggest economy was headed into a recession.
The index bottomed on March 17 after the Fed supported JPMorgan Chase & Co.'s takeover of Bear Stearns and agreed to become the lender of last resort to the biggest securities firms. The Fed cut its target for the overnight lending rate between banks four times this year, from 4.25 percent to 2 percent.
``It's not as dire as people thought,'' said Dean Junkans, who helps oversee $260 billion as chief investment officer at Wells Fargo & Co.'s wealth-management division in Minneapolis. ``The earnings that have come in have been pretty good. Instead of running for the hills, people are starting to look for opportunities.''
