Managers voice caution ahead of emerging markets elections

Crisis could be around the corner in major emerging nations this year as elections loom, raising questions for investors in their stockmarkets, according to fund managers.

The giant emerging economies of Brazil and India have elections coming up this year, along with South Africa, Turkey and Indonesia – which feature heavily in numerous portfolios that are available in the UK.

All of those markets already fell heavily last year as investors were spooked by the potential withdrawal of stimulus by the US Federal Reserve, which had fuelled inflows into these markets.

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In India, political rows have been blamed for delays to much-needed economic reforms and infrastructure investment, while economic growth has slowed to its lowest level in 10 years.

Sophia Whitbread, co-manager of the £285.5m Newton Emerging Income fund alongside Jason Pidcock, said opposition leader Narendra Modi’s success in his home state of Gujarat could bode well if he wins the Indian general election scheduled for the second quarter of the year.

“He has improved efficiency in Gujarat and if he can do that on a national level it would be wonderful because there has been a sense of paralysis on a political level,” Ms Whitbread said.

Franklin Templeton’s emerging markets guru Mark Mobius added that India could see “some positive surprises”.

He said: “If the BJP gains control on a national scale in the spring elections, it is likely to implement some big reforms that many – including ourselves – believe are badly needed.”

In Brazil, in spite of the weakness of its economy, the government is unwilling to implement unpopular policies ahead of the presidential election, according to JO Hambro Capital Management’s James Syme.

The manager of the £85.5m Global Emerging Markets Opportunities fund said: “Brazil is a more extreme version of Indonesia. Economic weakness and rising inflation are leading the government to try to prevent corrective policies as they would reduce the governing party’s chances of winning the October presidential and national assembly elections.

“This has included state-owned banks ramping up lending even as private sector banks become more cautious, oblique pressure on the central bank to be slow in raising interest rates and, most recently, turning down state-owned oil company Petrobras’s request for significant fuel price hikes.

“That last decision caused Petrobras’s market capitalisation to fall more than 10 per cent in a single day,” he said.

Elsewhere, Turkey was hit by a series of high-level political resignations in December last year following corruption allegations, while protests against the government have been commonplace since May 2013.

The country has a large current account deficit and a significant amount of its debt is financed by foreign investors.

Newton’s Ms Whitbread said the political disruption in Turkey was a factor currently detracting from the investment case for the country.

“We are much more cautious because of [Turkey’s] significant deficit,” Ms Whitbread said. “It has also seen considerable credit growth. The economy looks overheated. Because the Turkish government doesn’t have any real challengers it is quite difficult to expect much change.”