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Associated Press
Soccer-related trappings decorate a mall entrance in Sao Paulo, Brazil, where fans eagerly await the start of the World Cup today. Investors from around the world, meanwhile, are keeping a close eye on Brazil’s stock market.

‘Fragile Five’ markets gaining strength

– Soccer fans will focus on Brazil and the start of the World Cup today, but investors have been entranced by that nation’s stock market for months.

Brazil has company. From Sao Paulo to Mumbai, India, investors are regaining their faith in emerging markets this year.

It’s a big shift from 2013, when investment in those markets dried up because of worries about their slowing economic growth. It got so tough that five big developing markets – Brazil, South Africa, India, Indonesia and Turkey – were dubbed the “Fragile Five” by analysts at Morgan Stanley.

Now those countries are much more appealing to investors. Some have taken actions to strengthen their economies. Others have gone through political changes that have bolstered investor confidence. At the same time, slower growth in the U.S. has made investing overseas more alluring.

“These countries have done some homework to reduce their fragilities,” says Jorge Mariscal, chief investment officer for emerging markets at UBS Wealth Management. “They have helped themselves a bit.”

The “Fragile Five” raised interest rates to draw investors’ cash back into their countries. India, for example, lifted its rate from 7.25 percent in September to 8 percent in March; Brazil hiked rates from 7.5 percent in May of last year to their current level of 11 percent.

Higher interest rates are appealing to investors in the U.S., where the Federal Reserve has held its benchmark lending rate at close to zero for more than five years, and where bond yields remain low.

In India, the government has also raised duties on gold. The metal is India’s second-biggest import behind oil, and purchases have soared in recent years as incomes have risen there. The increased buying has sped up the flow of money out of the country and weakened its currency.

Politics is also playing a role.

Last month, Narendra Modi and the Hindu nationalist Bharatiya Janata Party notched the most decisive Indian election victory in three decades. Modi marketed himself as a leader capable of shaking the nation from its economic slumber, and his clear win should allow him to reform the economy.

In Brazil, stocks have rallied after polls were released that showed opponents of Brazilian President Dilma Rousseff gaining enough ground to have a chance of forcing a runoff in elections scheduled for October.

Developing economies should also benefit as global growth, led by an improving U.S. economy, begins to pick up later in the year, says Mauro Ratto, head of emerging markets at Pioneer Investments, a fund manager.

The Standard & Poor’s 500 index has climbed 12 percent since closing at its year low on Feb. 3. The MSCI India, a broad index of Indian stocks, has surged 30 percent over the same period. Turkish stocks have jumped 44 percent, and Brazilian stocks are up 26 percent.

Emerging markets have benefited from the Fed’s easy-money policies. Those policies, with their low interest rates, have prompted investors to hunt for higher rates of return overseas.

Last year, however, when the Fed started to outline its plan for reducing stimulus and raising rates, investors began pulling their money out of emerging markets. That caused their currencies, as well as their stock and bond markets, to plummet.

The MSCI Emerging Markets index, which measures 800 securities across 21 markets, fell almost 10 percent from the start of May to the end of June, and ended the year down almost 5 percent.

The Brazilian stock market may also get a boost if its team, the favorite to win the World Cup, lifts the trophy at the end of the tournament. Analysts at Goldman Sachs calculate that, on average, a victorious country’s stock market outperforms the global market by 3.5 percent in the first month after the win.

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