Brexit Sparks Emerging-Market Selloff as Polish Assets Worst Hit

LAGOS, Nigeria, Capital Markets in Africa: Eastern Europe and South Africa led a selloff in developing-nation assets following Britain’s vote to leave the European Union as investors speculated their economies will be the worst affected by the fallout from Thursday’s referendum.

Volatility in a gauge of currencies surged to the highest since March 2012 as Poland’s zloty tumbled the most in two months against the euro and the rand led emerging-market peers lower against the U.S. dollar. Benchmark stock indexes in Warsaw, Prague and Istanbul retreated at least 4.1 percent. The premium investors demand to hold emerging-market sovereign debt rather than U.S. Treasuries increased the most since June 2013. The cost of hedging against a default by Hungary jumped to a 17-month high.

The U.K. moved toward ending four decades of EU membership as the “Leave” campaign won the vote, prompting Prime Minister David Cameron to resign. That sent tremors across markets that rallied in the past five days on pre-vote predictions for a victory to the “Remain” side. The verdict increases the likelihood that emerging EU member states will receive lower financial support from the EU and lose out on common-market access to Britain.

“I went to bed thinking the U.K. would definitely stay in the EU and woke up in an entirely different world,” said Evgeny Shilenkov, head of trading at Veles Capital LLC in Moscow. “The worst part is that we still have many unknowns. I wonder if there will be a domino effect. The whole Brexit story hasn’t been priced in and we can see many surprises down the road.”

The MSCI Emerging Markets Index dropped 3.5 percent to 806.57 at 9:12 a.m. in New York, almost erasing a weekly gain. All 10 industry subgroups on the gauge fell. Developing-nation stocks trade at a valuation discount of 26 percent relative advanced-nation equities, compared with 25 percent earlier this week.

The MSCI Emerging Markets Currency Index slid 1.3 percent. The bond premium, tracked by JPMorgan Chase & Co. indexes, widened 26 basis points to 405.

To read Bloomberg’s main story on Britain leaving the EU, click here.

The following markets were the most affected in the hours after the referendum results were announced:

Poland

The WIG 20 Index in Warsaw tumbled 6.5 percent, heading for the biggest loss since September 2011. The zloty, regarded as a proxy for emerging-market risk to Brexit, slid 1.1 percent against the euro. The cost to insure the nation’s debt against default endured the biggest increase in three years. The yield on 10-year government bonds increased 23 basis points to 3.23 percent.

“Central and eastern Europe has by far the most to lose in all this, given they are the clear net beneficiaries of EU membership,” said Simon Quijano-Evans, chief emerging-market strategist at Commerzbank AG in London. “The rest of the EM has to start thinking about the secondary effects on global growth.”

Turkey

The Borsa Istanbul 100 Index of stocks slid 4.1 percent. The rate on the 10-year sovereign bond climbed 30 basis points. The lira retreated 2.4 percent.

South Africa

The rand was the worst performer among 24 peers tracked by Bloomberg against the dollar, euro and pound. The FTSE-JSE Africa All Share Index was poised for the biggest loss since 2008. The government’s 2026 bonds dropped, sending yields up 27 basis points.

“The rand will be affected in the short term with a general knee-jerk risk-off perception,” Philip Saunders, co-head of multi-asset management at Investec Asset Management Ltd., which oversees $116 billion, said by phone from London. “The initial reaction is probably going to be one whereby you see markets becoming somewhat disorderly and South Africa is going to be caught up in that backwash.”

Other Markets Central banks in South Korea and India were among those reported to have intervened to smooth trading in their currencies.

• The PX Index in Prague plunged to the lowest since 2009
• South Korea’s won closed down 2.4 percent in the biggest drop since 2011.
• Malaysia’s ringgit fell 1.9 percent after dropping as much as 3 percent earlier
• Indonesia’s rupiah and India’s rupee weakened at least 0.9 percent

Currencies perceived as more vulnerable, such as the ringgit and the rupiah, will be under pressure in the event of a Brexit, said Paul Danes, Asia portfolio manager at Martin Currie Investment Management, an affiliate of Legg Mason Inc., which manages $718 billion globally.

Some Asian sovereign bonds benefited from the risk-off environment. The South Korean 10-year yield fell 14 basis points to 1.50 percent and that on the Taiwanese notes declined four basis points to 0.76 percent.