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My Three Big Calls: Gary Potter on a year of political change in emerging markets

Emerging markets have underperformed over the past 18 months but with elections due in several countries we believe there is an opportunity to selectively add to both emerging market equities and fixed income

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China
The government is focusing more on structural reforms to rebalance the economy, rather than pushing for short-term growth. 

While the Chinese government has the luxury of not having to seek re-election, the new president and prime minister recognise that change is necessary for the next phase of China’s growth story and that keeping the population on-side and benefiting from improved wealth is vital for continued social harmony and to discourage any opposition to the communist party system.

India 

Elections have seen the BJP party of Narendra Modi, who appeared to be the markets preferred candidate, take power.

Indian equities have performed very strongly so far this year in anticipation of his victory.

The combination of prime minister Modi and governor Raghuram Rajan at the central bank is expected to be significant in driving the reforms seen as vital to unleash the potential of the Indian economy and ensure that the economic infrastructure is in place to support a population which will overtake that of China by 2028.

Brazil 

The government recently announced a 10 per cent increase in payments to the 46 million members of the Bolsa Familia scheme. This is clearly a populist move to increase social security payments ahead of the October elections. 

President Dilma Rousseff, lacking the charisma of her predecessor, has struggled to drive reforms in the economy and to meet the demands of an ever growing middle class. 

Nevertheless, despite falling ratings in the opinion polls, her support remains equal to the combined support for two main opposition party candidates.

A win for the Brazil football team and a trouble-free World Cup should see Dilma re-elected. 

However, markets may prefer the more business friendly and reform minded opposition parties to win, even if it does mean a terrible World Cup for Felipe Scolari’s men!

The tailwind of demographics remains in place over the longer term, but adopting and embracing structural reforms can drive productivity and improve the attractiveness of emerging market investing, something that will be important as we move into a world of rising developed market interest rates over the coming years.

Gary Potter is co-head of multi-manager at F&C

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