InvestmentsJan 21 2014

Managers voice caution ahead of emerging markets elections

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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.

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.”

But M&G’s Asia and emerging markets manager Matthew Vaight argued: “Historically, when times are bad, you often get better outcomes from elections.

“Governments are more likely to campaign on manifestos that pledge reforms when the economy is languishing and politicians’ popularity ratings are low. [Countries such as India] could benefit from economic and corporate reforms and the economy is likely to be centre stage during campaigning.”

China making waves in East China Sea

It is not just countries preparing for elections that are being overshadowed by politics. JO Hambro Capital Management’s James Syme, manager of the £85.5m Global Emerging Markets Opportunities fund, said tensions between China, Korea and Japan could also affect the outlook for trade in South-East Asia.

The three countries dispute the control of the East China Sea and their respective claims are being militarily enforced. In addition, currency fluctuations could hamper trade between the countries, Mr Syme said.

“Should the yen continue to devalue against the renminbi in 2014, then there is a significant chance that China will make life much more difficult for Japanese companies in China,” he explained.

“Should the [East China Sea] conflict escalate, we may well see a return to the situation in 2012, where several high-profile Japanese companies experienced unofficial popular boycotts in China.”

Countries facing elections in 2014

India

The ruling Indian National Congress faces a tough battle against the increasingly popular Bharatiya Janata Party (BJP) in the general election this year.

Its growth is slowing and political stalemates have hindered efforts to kickstart its economy and invest in local infrastructure. In August the Indian government appointed former IMF chief economist Raghuram Rajan as governor of the country’s central bank, to be tasked with restoring faith in the rupee.

As an example of the weakness of the currency, India’s Sensex stock index rose 8 per cent in local currency terms in 2013, but sterling investors would have suffered a loss of 6.1 per cent and dollar investors would have lost 4.4 per cent.

Brazil

South America’s largest economy is stuck in a rut of high inflation and low growth. Last year, a hike in transport fares sparked riots, which quickly expanded to become protests against perceived government corruption and poor public services, less than a year before the country is due to host the football World Cup.

Early opinion polls indicate current president Dilma Rousseff is likely to stay in power, but two of her rivals have combined to make a joint bid for the presidency, which may force the government to acknowledge its economic issues.

Economic growth has collapsed from 9.3 per cent in the first quarter of 2010 to just 2.2 per cent in the third quarter of 2013. Inflation has remained close to 6 per cent for most of last year.

Indonesia

Indonesia’s currency, the rupiah, plunged last year on the back of speculation about the withdrawal of economic stimulus by the US Federal Reserve. Between May 22 and December 31 the currency fell 24.5 per cent against the dollar, largely due to withdrawals by foreign investors.

Its stockmarket – popular with emerging markets managers seeking to diversify from larger economies – fell dramatically with the MSCI Indonesia index posting a 24.9 per cent loss in sterling terms in 2013.

Economic growth is relatively strong at 5.6 per cent in the third quarter of last year, but has been slowing, and inflation rocketed to 8.6 per cent last summer and has remained at this level ever since.

Indonesia faces presidential and parliamentary elections in the coming months, although candidates have yet to be finalised.

South Africa

Following the death of South Africa’s first post-Apartheid president Nelson Mandela in December, the country’s 2014 presidential elections, scheduled for the second quarter of the year, are likely to be particularly emotionally charged.

The ruling African National Congress – led by president Jacob Zuma – has already lost the support of a metalworkers’ union and some analysts have told local press that the ANC is unlikely to retain its current majority.

Although it is Africa’s biggest economy, South Africa has one of its highest unemployment rates at almost 25 per cent, while inflation has remained above 5 per cent since the summer of 2012. Economic growth has fallen from nearly 4 per cent in 2011 to just 1.8 per cent in the third quarter of 2013.