Investors in emerging markets are getting slammed by a fresh wave of political turmoil that is derailing bets from Latin America to Eastern Europe.
With just weeks to go until key presidential votes, markets in Colombia and Peru are selling off as traders recalculate odds of left-wing candidates prevailing. Bolivian bonds have tumbled as street protests against the government threaten supplies of food and medicine to the nation’s capital. In Turkey, markets tanked after a court removed the leader of the country’s main opposition party.
The episodes are a fresh reminder of underlying risks that still plague the asset class, which has delivered strong returns for investors in the past year — even as tensions in the Middle East rattled global markets.
“Political risk manifests itself when the macro is under pressure, and in an environment where all the prices are going up, especially in oil-importing economies and poor countries the issues flare up, they come to the fore more vividly,” said Francesc Balcells, chief investment officer at FIM Partners, whose firm oversees $5 billion. “I wouldn’t be surprised if we see more of that going forward.”
In Latin America, some of the best rallies in the developing world are fading as investors dial back exposure. The region’s markets had been on a roll this year, buffeted by a relative insulation from the war on Iran and by being home to countries that benefit from higher crude prices.
Hopes that market-friendly candidates would prevail in upcoming elections had also helped fuel gains. But in the lead up to the votes in Colombia and Peru, firms including PPM America, JPMorgan Asset Management and Allianz Global Investors say inconsistent polling and wild-card candidates have muddied the scenario. In Brazil, President Luiz Inacio Lula da Silva reclaimed the lead in voter intentions with his main rival ensnared in a corruption scandal.
“It’s difficult to read these outcomes with a very strong degree of certainty — that makes it very difficult to trade or position around,” said Alexander Robey, a portfolio manager at Allianz Global Investors. “So we don’t really have a strong directional view and I think anyone who says they do is probably overconfident.”
