Messiest Politics the Best for Emerging-Market Money Manager

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  • Returns compensate for risks, according to OMIG’s Nxumalo
  • Sustained U.S. rate increases positive for emerging markets

Developing countries experiencing the deepest political turmoil shouldn’t deter investors, because they offer some of the best opportunities, according to the joint head of Old Mutual Investment Group’s emerging-markets unit.

“The politics always give us an opportunity,” Siboniso Nxumalo, co-head of Global Emerging Markets at OMIG, told reporters in Johannesburg Wednesday. “The best-performing market in the world this year is Brazil, which had one of the messiest politics. Russia is the second-best performer, which also has some of the worst politics.”

The benchmark Ibovespa Brasil Sao Paulo Stock Exchange Index is up 31 percent this year after falling 13 percent in 2015. Michel Temer replaced Dilma Rousseff as president after an impeachment trial in the senate that ended Aug. 31. The MICEX Index of the 50 most liquid Russian stocks has gained 13 percent this year, against the backdrop of U.S. sanctions imposed after the annexation of Crimea in 2014 and criticism of President Vladimir Putin’s military intervention in Ukraine and Syria.

Turkey, where President Recep Tayyip Erdogan crushed an attempted coup in July, and South Africa, where uncertainty over whether Finance Minister Pravin Gordhan will be removed and charged by police has weighed on markets, are among other countries where Nxumalo sees opportunity.

“From our perspective, yes, there are risks, but you are compensated by the returns.”

Even a sustained cycle of U.S. interest-rate increases shouldn’t spell gloom for emerging-market investors, because they are a positive signal for developing economies that benefit from strength in the world’s biggest economy, said Nxumalo.

“Because who manufactures for the U.S.? Who supplies them with goods? Who sends them commodities to be able to generate that growth?” he said. “Everything that the developed world consumes is largely managed and manufactured in emerging markets.”

Goldman Sachs Group Inc. forecasts a three-percentage-point U.S. rate increase during a Federal Reserve rate tightening cycle continuing through 2019. Derivatives traders are pricing in roughly 50 basis points of tightening over the same period, data compiled by Bloomberg show. The Federal Reserve will announce its rates decision at its next meeting on Sept. 21.

“We don’t look at the rates thing as a risk,” Nxumalo said. “We look at it as an opportunity if it happens on a sustained basis, because the world manufactures from emerging markets.”