Emerging market elections: What investors need to know


11 Mar 2024

The investor focus on emerging market elections reveals some interesting insights, says Andrew Holt.

Emerging markets

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The investor focus on emerging market elections reveals some interesting insights, says Andrew Holt.

Emerging markets

In what is a big election year, the focus has, inevitably, been on the pending US and UK national elections.

Less covered is another set of elections, that of three national votes in emerging markets: Indonesia, South Africa and Mexico. Each present quirks and attractions to investors. So how should investors position themselves ahead of these elections?

In Indonesia, a first round victory was claimed by Prabowo Subianto and his running mate Gibran Rakabuming, who is soon to be ex-President Jokowi’s son.

This election not moving to a second round in June reduces the political risk premium, and the influence of Jokowi via his son indicates policy continuity, said Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Global Markets.

“Investors went into the election overweight the Indonesian rupiah, and while some of the shorter-term flow profiles allude to a modest lightening of positions in the run-up to the election, the actual outcome is as market friendly as can be expected,” Evans added.

Disciplined macro

For Kim Catechis, investment strategist at the Franklin Templeton Institute, investors appreciate the country’s disciplined macro-economic policies. “The steady increase in exports of processed metals means external deficits are unlikely to spiral out of control,” he said. “Meanwhile, its improved infrastructure has helped limit logistic costs, thus helping control inflation.”

In the election campaigns there was much talk of higher social welfare payments, which could potentially pressure the fiscal deficit, but the candidates also talked of tax reform to increase government revenues.

Regardless of the election, Catechis said: “Indonesia will be able to continue to balance relationships with China and the United States, while being well placed to build a key position in the new architecture of global supply chains, based around its critical mineral resources.”

Looking at the impact of the inaugural presidential election of 2004 on the equity market, it returned +10% return within 44 trading days following the election date across the four presidential elections observed since 2004. Which bodes well for investors in the coming weeks and months.

“In the periods leading up to elections, Indonesia’s stock market predominantly exhibited positive returns, except for 2019, when the market showed at to negative returns,” Catechis said.

Hung parliament

But for Evans, the South African election is potentially the most interesting across emerging markets this year. “A political landscape dominated by the ANC for 30 years is at risk of fragmentation, as opinion polls indicate government support at around 40% to 45% and realistic prospects for the first ever hung parliament in South Africa,” he said.

This, nevertheless, creates challenges, Evans said. South Africa’s Constitution is centred on a hegemonic power structure, but regional or issue-specific coalitions is a positive to the extent that parties will need to work together in government, albeit against a backdrop of weak institutional structures, so this could easily break down.

“For now, investors are constructive on the South African rand, but have reduced exposures to rand-denominated government bonds, which signals potential concern on South Africa’s debt backdrop,” Evans said.

And he added: “The uncertainty around the election outcome will impact political risk premium and investors may well want to hedge exposures as we move towards elections, which must be held by August 2024.”

Mexican controversy

Mexican elections have become increasingly embroiled in controversy amid accusations that President Andrés Manuel López Obrador has proscribed constitutional reforms to pave the way for his preferred successor.

Opinion polls continue to suggest another left-of-centre administration, but support has slipped over the past month and it remains to be seen whether this will continue given widespread, nationwide protests.

“Mexico is in the electoral crosshairs: it is also among the most vulnerable to a Trump re-election in the US, but investors continue to like Mexican assets for now given a number of supportive fundamental pillars,” Evans said. “Exposure to Mexican peso assets will become potentially more volatile as we approach election season, not least is interest rate easing by central bank reduces Mexico’s yield advantage.”

For Blackrock, a change of government in Mexico this year “may usher in a more business-friendly environment” and could allow Mexico to capitalise on the nearshoring trend, the asset manager wrote in an investor outlook.

There are already benefits being seen in the country. “Mexico is enjoying the benefits of US companies relocating manufacturing away from China,” added Andrew Dalrymple, investment manager at Aubrey Capital Management.

India could join the list of an emerging market facing elections and investor appeal. The country performed well in the fourth quarter last year “as earnings growth continued to surprise on the upside and foreign investors, who had been cautious with regards their Indian exposure in recent months, returned to the market,” Dalrymple said.


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