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The best of times? The worst of times? A tale of two emerging markets

By: Mary Fjelstad, Senior Research Analyst

“It was the best of times, it was the worst of times” runs the famous opening line of Charles Dickens’s novel ‘A Tale of Two Cities’, and although he was referring to the period of the French Revolution, we could just as well apply it to the contemporary comparison of two major emerging markets over the last couple of years. The economies of Brazil and Mexico followed radically divergent trajectories in 2015 and 2016 as macro-economic forces, currency movements and local economic developments worked on each country differently with strikingly different results for their stock markets as reflected in FTSE Russell indexes.

Emerging Markets as a whole suffered in 2015 both in USD and local currencies as measured by the FTSE Emerging Index USD (FTSE EM USD) which fell 15.22% in 2015 and the FTSE Emerging Index Local Currency (FTSE EM Local) which dropped by 5.83%.[1] Often highly vulnerable to the price of oil, the economies of many emerging market countries suffered in 2015 as oil prices plummeted. In 2016, as oil prices rebounded by over 40%, both the EM USD and EM Local indexes saw increases of more than 10%.[2]

But by taking a closer look at two country-specific emerging market indexes, we can see how certain idiosyncratic drivers—in addition to the larger systemic forces such as global oil prices—can affect economies in contrasting ways. As we can see below, the FTSE Brazil Index USD (FTSE Brazil USD) and the FTSE Brazil Index Local Currency (FTSE Brazil Local) have behaved similarly to emerging markets as a whole while the FTSE Mexico Index USD (FTSE Mexico USD) and the FTSE Mexico Index Local Currency (FTSE Mexico Local) have behaved quite differently.

For Brazil, 2015 exemplified the “worst of times”. The oil and gas sector share of the country’s GDP has grown from 3% in 2000 to 13% today, giving the economy an increasingly high sensitivity to the plummeting oil price in 2015.[3] Contributing to the even sharper decline in the Brazil USD Index, which fell more than 40% in 2015, was the 33% decline in the Brazilian Real compared with the USD.

But for Brazil, these same drivers would help the country bounce back to some of the “best of times” in 2016. As oil prices shot upwards in 2016, so did the FTSE Brazil USD and FTSE Brazil Local Indexes—whose values rose 68% and 37%, respectively. In addition, both the August 2016 Summer Olympics, which were largely viewed as a success, and the replacement of President Rousseff with what many view as a more business friendly regime helped bolster the Brazilian Real, leading to the significant increases seen in the FTSE Brazil USD Index.

Mexico’s economy, on the other hand, is less correlated to oil prices as the oil and gas segment only represented approximately 5.3% of the country’s GDP at the end of 2015.[4] As illustrated below, the cumulative returns for both the FTSE Mexico USD and FTSE Mexico Local Indexes have been mostly flat for both 2015 and 2016. While Mexico did not experience the “worst of times” in 2015, it also did not benefit from the “best of times” rebound in 2016 as Brazil did. However, due to its higher sensitivity to the US economy and policies, Mexico began to suffer in the fourth quarter of 2016 as the US election unfolded, as measured by the performance of the FTSE Mexico USD and FTSE Mexico Local Indexes. 

Although 2016 may not have been quite the “worst of times” for Mexico, the uncertainty surrounding the country’s future relations with the United States has become a cause for concern. This is reflected in the 2016 fourth quarter decline in value for the FTSE Mexico USD and FTSE Mexico local indexes of 7.93% and 1.99%, respectively. The more significant decrease in the FTSE Mexico USD index was largely due to the Peso’s decline in value compared with the USD of 6.06% in the fourth quarter.

So while oil dependence and currency fluctuations against the US dollar were important to both economies over the last two years, other idiosyncratic risks affected each economy in critical ways at the local level. A year that may be the “best of times” for one country, in other words, may well be another country’s “worst of times”.

For more analysis of emerging markets in 2016, see the FTSE Russell blog ‘A two-handed look at multiple factors in emerging markets’.


[1] Source: FTSE Russell. Data January 1, 2015 through December 31, 2015. Past performance is no guarantee of future results.

[2] Source: FTSE Russell. Data as at December 31, 2016. Past performance is no guarantee of future results.

[3], January 2017

[4] Bloomberg L.P., February 2016

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