Eq: EMs

(Rio de Janeiro)

Emerging markets are seeing their brief reprieve from downward pressure ending abruptly as market concerns over a pending Fed rate rise run their inevitable course. The release of Fed minutes last week has led to a strong and steady change of perspective on the direction of rates, turning the overall market view to one of “risk-off” where equity, commodity, and emerging market assets suffer. In total the MSCI emerging market index fell 3% last week. An analyst from BNP Paribas Investment Partners said that markets cannot forget about emerging markets’ rising debt, widening deficits, and slowing growth. Even the brief rally EMs had recently seen is reported to have been light-hearted as it was supposedly only ever driven by short-covering.

FINSUM: The outlook for emerging markets is very bleak, especially if the US hikes. It is hard to see EM assets performing well in the near term.

Source: Financial Times

(Sao Paulo)

Brazil appears on the edge of a full blown revolution. The country is in the midst of a complex and tense political standoff which has its citizens rioting violently. Current president Dilma Rousseff made an appointment for Lula Da Silva, the country’s former president and Roussef’s mentor, to become a government minister. However, the opposition argues that this was only done to shield Da Silva from immediate arrest related to corruption charges, as holding a ministerial position makes Da Silva immune from all court proceedings other than the Supreme Court, which is more likely to rule in his favour. However, just as the swearing in process was occurring, a separated judge issued an injunction blocking the appointment on the grounds that it would prevent the “free exercise of justice”. Protests enveloped the country Wednesday and Thursday as recordings were released of Da Silva speaking about the investigations and a conversation with Rousseff about the appointment. Brazilian assets rallied as investors saw the government as likely to fall.

FINSUM: This is quite a political and societal volcano for Brazil, and seems to be the culmination of a long period of growing frustration. Anyone’s guess how this will affect Brazilian markets.

Source: Financial Times

(Rio de Janeiro)

Pimco, one of the world’s best known asset managers is joining a growing body of firms who believe emerging market assets offer a tremendous opportunity. A sub-adviser to Pimco, Research Affiliates, says that “The exodus from emerging markets is a wonderful opportunity -- and quite possibly the trade of a decade -- for the long-term investor”. Pimco joins Goldman Sachs Asset Management, BlackRock, and Franklin Templeton in getting bullish on EMs after three years of poor performance in the space. Research Affiliates thinks that emerging market assets are “exceptionally cheap”, after the MSCI’s benchmark gauge fell 30% over the last three years. The Shiller P/E Ratio for emerging markets dropped to 10 in January, a level it has only gone below six times in the last 25 years, with an average five-year rally of 188% following.

FINSUM: We think emerging markets are a good long-term buy, as development and financial capitalism are unstoppable forces that will lift markets in the developing world. However, on a more country specific basis, there are major risks. Consider Japan, which 30 years ago would have been seen as an emerging market, a country whose economy peaked in the early 1990s and has since stagnated. China could be the next Japan.

Source: Bloomberg

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