Changing perceptions
These changes in perceptions and economics have been accompanied by changes in relative outperformers across a variety of metrics. In terms of countries, the laggards of last year, namely Brazil and South Africa, have been the strongest performers year to date in 2016 with returns of 42% for the MSCI Brazil 10-40 Index and 18.6% for the MSCI South Africa NR USD Index.
In Brazil, its equity market has delivered strong returns and the real has strengthened. This is thanks to increased commodity prices that buoyed some of the largest stocks in the market, and optimism over political developments. The impeachment of president Dilma Rousseff, for example, led many investors to take a more positive view of the potential for political change and economic reform in the country.
South Africa has also benefited from rising commodity prices, however, political and economic difficulties remain, with president Jacob Zuma facing criticism, low economic growth and rising inflation.
In addition to a strong return in 2015, Russia has again rewarded investors. The equity market was buoyed by the increasing oil price with almost 60% of the MSCI Russia Index in energy. The rouble also rose against the US dollar, adding to performance in dollar terms.
China has, however, been a detractor, with the MSCI China 10-40 Index showing a negative return of just over 5%. Although allayed to some degree, there remain concerns over the Chinese economy and the ability of the large state-owned enterprises to deal with more difficult conditions. The country is also not able to benefit like others from commodity price rises.
At a sector level, there has also been an about-turn. Given the rallies seen in the spot prices of oil and materials, such as iron ore, there is no surprise that both the energy and basic materials sectors have been contributors to returns, especially given the combined benchmark weighting of over 40%.
There has also been a rally in financial services, another of 2015’s laggards, with banks in Brazil showing good contributions.
Style returns show larger caps and value leading the way. Returns to value factors such as high yield and low price to book have been strong, in stark contrast to 2015, while there has also been a switch in terms of quality factors.
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