July 23, 2014 / 10:12 AM / in 3 years

EMERGING MARKETS-Indonesia, Russia gains push emerging stocks to new 17-mth high

LONDON, July 23 (Reuters) - Emerging equities hit new 17-month highs on Wednesday, buoyed by strong post-election gains in Indonesia and a rise in Russian stocks after a conciliatory tone from the Kremlin over the downed Malaysian Airlines jet.

A batch of positive earnings in Europe and the United States along with robust U.S. economic data have lifted sentiment and somewhat offset potential geopolitical repercussions from last week’s shooting down of a Malaysian Airlines plane over eastern Ukraine.

Political developments within emerging markets have also helped, with Indonesia declaring reform-minded Joko “Jokowi” Widodo as the winner of its presidential election. Jakarta shares rose nearly 1 percent while the rupiah set a two-month high.

“This is positive news, when both the equity markets and the rupiah strengthen. As per volatility and return potential versus its EM peers, (Indonesia) offers the best carry return,” said Tanya Rawat, analyst at Arqaam Capital in Dubai.

The cost of insuring Indonesian sovereign debt against default dropped on Wednesday with five-year credit default swaps dropping to 143 basis points from 149 bps on Tuesday, according to financial data provider Markit.

The Indonesian result also means this year’s hectic election cycle in emerging markets is continuing on a positive note after the win of another reform-minded leader in India, analysts say.

Brazilian equities had hit 16-month highs on Tuesday as polls showed left-leaning President Dilma Rousseff continuing to lose popularity, boosting the chances of a more reformist government after October elections.

Those gains have boosted MSCI’s emerging market equity index to levels last seen in early 2013 for year-to-date gains of 7.6 percent, on a par with Wall Street.

Russian shares were more than 1 percent higher a day after comments from President Vladimir Putin stating Russia would try to ensure that Ukrainian separatists cooperate with an investigation into the jet crash.

U.S. intelligence officials said on Tuesday they believe pro-Russian separatists likely shot down Malaysia Airlines Flight MH17 “by mistake.”

“The new development is that at least the U.S. is recognising that there is no direct involvement of Russia and it was a mistake by Ukrainian separatists,” said Commerzbank analyst Thu Lan Nguyen.

Russian CDS dropped 6 basis points to 202 bps and the rouble rose 0.4 percent to the dollar to a near one-week high.

However, gains in Russian assets are likely to be capped by foreign investors’ reluctance to add positions due to sanctions-related risk and a looming economic recession.

“We are structurally underweight Russia predominantly on the weak economic outlook but also on the potential for tail risk moves on increased geopolitical uncertainty,” said Daniel Wood, a portfolio manager at Fischer Francis Trees & Watts, a BNP Paribas subsidiary.

“I believe that geopolitical events in the region over the past six months have added a higher structural risk premium to Russian assets that will not be reduced in the near future.”

The South African rand also firmed to nearly two-month highs versus the dollar on hopes a three-week long metalworkers strike would soon end while inflation data showed price growth running above the central bank’s target.

That indicates interest rates will remain high.

Elsewhere, Senegal is coming to the market on Wednesday with a new 10-year dollar bond, offering initial yield guidance in the 6.625 percent area, according to lead managers.

In Saudi Arabia, stocks were up 0.7 percent, adding to strong gains the previous day and reaching a new six-year-high after regulators said they would open the market to foreign institutional investors.

For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t

For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s

For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s

For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see )

Additional reporting by Spriha Srivastava; Editing by Susan Fenton

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