The benchmark Bovespa index rose 2% on the back of speculation that the loss will hurt President Dilam Rouseff’s re-election chances in October. Support has fallen due to the mushrooming scandal involving oil company Petrobrasa and allegations around over-pricing, concerns over rising inflation, expectations that health and education services will deteriorate and fears over crime increasing.
“Brazil needs a change and the economy has to be shaken out of its low growth,” says Whiting. “Expectations are that GDP will only be 2% this year and reforms are needed to get consumers shopping again. There has been a lot of political interference and the government is currently spending more than it’s bringing in. However, there are still many very well run companies which is why investors need to be selective.”
Opinions are also divided over India and the ability of Narendra Modi and his Bharatiya Janata Party to deliver the promised goods. The country’s stock market enjoyed an almost 20% surge while the rupee, which lost 13% against the dollar in 2013, was one of the best performing emerging market currencies in the run up to the election. The three-time chief minister of the state of Gujarat may have a good track record in his home state but reforming the entire country will not be easy. Growth in Asia’s third largest economy has slowed to below 5%, inflation has dipped but is still 7.3% while industrial production has contracted down 0.1% in the financial year ended this March.
Dehn is encouraged by India’s Finance Minister Arun Jaitley’s recently published and much awaited Budget, which delivered an ambitious fiscal deficit target of 4.1% and a target for fiscal year 2017 of 3.0% of GDP.
“This is extremely positive. Excessive fiscal spending has been the main source of macro-economic imbalance in India in recent years. Tighter fiscal policy will reduce inflationary pressures and give room to the central bank to ease rates. We note that the government took another step towards opening its domestic bond markets – Indian bonds will now be allowed to be cleared internationally. This should help to remove one of the two major obstacles to index inclusion for Indian bonds, namely cumbersome settlement.”
Paul Rogers, portfolio manager and analyst on the Lazard Emerging Markets Core Equity Fund, is more cautious though. “The elections were favourable but we are not getting too excited because it is one thing to promise reforms and another to implement them. The country is moving in the right direction but it will take time. Overall though, we are fundamental stock pickers and at the moment are overweight consumer discretionary companies because this will continue to be an important theme in the future due to the growing middle classes in many emerging market countries.”
DIGGING FOR OPPORTUNITIES
Studies have shown that by 2030, a further 1.3 billion people in these countries will reach middle-income levels with some countries getting to the next income bracket faster than others. For example, Egypt, Indonesia and the Philippines in combination are expected to be ahead of Brazil or Russia. However, fund managers believe each market has advantages and risks.
As Whiting notes: “We have trimmed our exposures to India, but there was a strong run up before the election. The result was positive and while there is still excitement over change, you need to be careful that the market does not run ahead of the fundamentals. We have though increased our positions in Russia, although if you were not an experienced investor you would avoid the market. We think there are companies such as Sberbank that are sitting on attractive valuations and regardless of the situation in Ukraine, it is here to stay. They have also started to pay a 3.5% dividend yield.”
Hilde Jenssen, portfolio manager, Skagen Kon-Tiki also believes opportunities can be mined in Russia. “We have a position in Sistema, Russia’s largest holding company with a strong portfolio primarily in energy and telecom,” she says.
But equities though are not the only attractive asset class. Dehn believes emerging market fixed income offers better value. “EM is now over 50% of global GDP, so its credit fundamentals improved further relative to developed economies last year. So investors have a safer alternative to developed market fixed income as global monetary policy normalisation looms.”
Comments