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Jonathan Wheatley

Jonathan Wheatley is the FT's deputy emerging markets editor. He was Brazil correspondent from 2005 to 2011, when he moved to London. He lived in São Paulo from 1992, writing for the FT, Business Week, the Economist Intelligence Unit and many others. He previously worked in television news, current affairs and documentaries in London.

With GDP growth in China slumping to a five-year low, it’s unsurprising that many fund managers have cut their positions in Chinese equities to less than the weighting suggested by the benchmark MSCI Emerging Markets index.

But if you are an active fund manager, how strong a position have you taken by going underweight if all the other fund managers are underweight, too? 

Do Brazilian voters care whether their politicians are corrupt? More particularly, do they care about political scandal at Petrobras, the state-controlled but publicly traded oil group that is both national champion and national treasure, a cherished symbol of Brazilian potential and prowess?

If you believe the latest opinion polls they either do care, in spades, or they don’t, not one bit. 

What will happen in the second round of Brazil’s presidential election? The race has been thrown wide open by the surprisingly strong showing in the first round of Aécio Neves, the pro-business candidate of the centre-right PSDB. He won 33.6 per cent of the vote, well ahead of his highest standing in opinion polls just before Sunday’s election, of 27 per cent support. He enters the second round 8 percentage points behind the incumbent, Dilma Rousseff of the leftwing PT, who got 41.6 per cent of the vote, compared with 46 per cent in the latest poll.

Source: Thomson Reuters

With Aécio on the way up and Dilma on the way down, investors cannot contain their excitement. The Bovespa equities index was up 7 per cent in the first half hour of trading on Monday morning in São Paulo. 

Enthusiasm over Narendra Modi’s election in India and fears that Dilma Rousseff may be re-elected in Brazil have prompted a sharp reversal in the two countries’ positions among equity fund managers.

Source: Copley Fund Research

According to a report published on Monday by Copley Fund Research, which tracks the investments of 100 global EM equity funds with $280bn of assets under management, India overtook Brazil in September to become the second biggest EM after China in terms of aggregate country holdings, with $31.6bn in AUM, ahead of Brazil’s $29.6bn. 

Extraordinary early results in Brazil’s presidential election. With 83 per cent of the votes counted, Dilma Rousseff has 40 per cent and Aécio Neves – the markets’ favourite, until recently lagging in third place in onion polls – is close behind on 35 per cent.

Marina Silva, the leader in the polls just a couple of weeks ago, is on 21 per cent. 

A double dose of gloom from Capital Economics on Tuesday. Its proprietary EM GDP tracker – compiled from monthly data on output and spending as an advance proxy for GDP – shows growth slowing across emerging markets to its slowest pace since early last year. A separate report shows that while EM assets have suffered across the board this month, the pain has been particularly severe in Latin America and especially in Brazil.

First, here are the charts from the GDP tracker. They show growth across EMs slowing to 4.3 per cent year on year in July, down from 4.5 per cent in June. Capital says preliminary data for August suggest growth will be even slower, at 4.1 per cent. 

Portfolio flows to emerging markets made up some of last month’s losses in September, according to estimates by the Institute of International Finance. Its Portfolio Flows Tracker for September, published on Monday, shows that flows to EM equities fell slightly to about $8bn in the month, while flows to EM debt picked up to about $10bn.

Nevertheless, the IIF described investor behaviour as “cautious” amid changing expectations about the pace of monetary tightening in the US. 

Economists surveyed by Brazil’s central bank kept their run of gloom unbroken on Monday, chalking up 18 consecutive weekly downward revisions of their consensus on GDP growth this year. Their view changed just one basis point, to 0.29 per cent growth from 0.3 per cent last week – almost as if they wanted to deliver one last dose of negativity before this weekend’s general election.

But if the mood among economists is resolutely gloomy, things are looking up for President Dilma Rousseff, hoping to win a second term in the election. Brazilians, it seems, have no wish to punish her for her government’s dismal record on the economy and she is once again the favourite, according to opinion polls. 

Hat tips to a couple of beyondbrics readers for this one: the coining of a new economic predicament in the form of the stagno-squeeze, in which zero growth and rising prices leave governments and citizens squeezing every last drop of benefit from what they already have, given the difficulty of obtaining or producing anything more.

And how apt that Brazil’s government should immediately demonstrate the stagno-squeeze in action, by raiding its sovereign wealth fund to plug a widening hole in its budget. 

As beyondbrics noted early this month, the recent “dollar surge” and rising US interest rates are already having an impact on EM currencies. Two weeks later and the effects are becoming more pronounced, as the charts below show.

First, US interest rates. This is the yield on 10-year US Treasury bonds this year.

Source: S&P Capital IQ


First the good news: the emerging market growth story is intact. EMs will continue to own a bigger and bigger share of the global economy, delivering attractive though volatile returns for investors. Now the bad news: EMs will never actually emerge. Even as they grow in importance, they will never achieve developed market status.

That is the view of Richard Titherington, head of emerging market equities at JP Morgan Asset Management. Despite what may sound like a gloomy prognosis, he describes himself as an optimist. Most of the problems facing emerging markets are cyclical rather than structural, he says. If the markets work, EMs will continue to pick up relative to DMs. 

As Brazil’s polling day draws closer, another data point emerged on Friday for the voters’ consideration: consumer price inflation is back above the upper limit of the government’s target range and shows no sign of falling back soon.

The IBGE, Brazil’s statistics office, said CPI in the month to mid-September was 0.39 per cent, bringing the accumulated rate over the past 12 months to 6.62 per cent. That was above the consensus forecast of 0.35 per cent for the month, according to Bloomberg. 

On Valentine’s Day 2011, a court in Ecuador ordered Chevron, the US oil major, to pay $19bn to indigenous peoples and villagers to compensate for pollution caused between 1964 and 1990 by Texaco, which Chevron had bought in 2001. It was the biggest award ever against a corporation outside the US and was hailed by environmental and other campaigners worldwide as a landmark victory for usually voiceless and defenceless peoples over the usually all-powerful Big Oil.

But Chevron felt it had been treated unfairly and counter-sued in the US. On March 4 this year, Judge Lewis Kaplan of the US District Court in New York found Steven Donziger, the US lawyer who represented the Ecuadorian plaintiffs, liable for leading a multifaceted racketeering conspiracy. 

Is this month’s bear run in EM equities merely a correction or the start of something big? As fast FT reports, the FTSE Emerging Market index is heading for its longest sustained losing streak since September 2001.

Anyone looking for signs of a structural shift will be interested in the chart below from Fitch Ratings, showing an improvement in both ratings and outlooks in the developed world that is the opposite of a strongly negative trend in EM this year. 

Another week and yet another cut in the consensus on Brazilian GDP growth this year. The central bank’s weekly survey of 100 market economists has notched up 16 consecutive weeks of downward revisions to bring the consensus on GDP growth to just 0.33 per cent this year. The outlook for 2015 also fell, to 1.04 per cent.

At least the central bank’s survey is not alone. The OECD, also on Monday, in its latest Economic Outlook cut its forecast of Brazilian growth to just 0.3 per cent this year and 1.4 per cent in 2015. That’s down from an expected 1.8 per cent in 2014 and 2.2 per cent in 2015 at the OECD’s last Economic Outlook in May.