Our Global Head of Emerging Markets Sovereign Credit reviews key insights and strategies for investors following the recent elections in Mexico, South Africa and India.
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Welcome to Thoughts on the Market. I’m Simon Waever, Morgan Stanley’s Global Head of EM Sovereign Credit and Latin America Fixed Income Strategy. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss the far-reaching impact of emerging market elections on global markets.
It’s Friday, June 7, at 10am in New York.
Elections in 2024 will impact roughly 4 billion people around the globe – that’s the most in history. And within emerging markets, elections this year will impact nearly half the market cap of both hard and local currency debt indices and 60 percent of equities. With a dozen elections in the emerging markets sovereign credit universe already behind us, there are still almost another twenty more to go.
We find that elections in emerging markets matter for both credit spreads and fiscal balances. And a frequent investor question is how to trade positive and negative election outcomes. This can be defined in many ways, of course, but we focus on whether credit spreads widen – which is a negative – or tighten – which is a positive – in the week post-elections. And history suggests that buying into negative election surprises has been a profitable strategy. But on the other hand, positive elections, they’re priced in beforehand and should not be chased post-outcome.
So why is that, exactly? Well, for positive elections, markets tend to rally nearly continuously into the elections; but after the initial week of tightening, spreads then revert and end up trading only slightly tight to the levels prior to the elections.
And then for negative elections, there’s actually no real trend ahead of the elections, with spreads largely flat. But then, after the initial sell-off, credit spreads end up reversing the initial move wider, and three months out the spreads are tighter than immediately post-elections.
So, with this in mind, let’s consider the three most recent election outcomes in Mexico, India, and South Africa. And actually, all three had an element of surprise.
In Mexico, they elected their first female president, Claudia Sheinbaum. That was expected – but the surprise was that she got a much larger majority than polls suggested, which means that it becomes easier to push through constitutional changes. So, I think it’s fair to say that uncertainty has increased, and markets are now in a wait-and-see mode looking for what policy she will prioritize.
And from my side, I’m paying particularly close attention to the many reforms submitted by the executive to the Congress back in February, and then any signs of fiscal consolidation, which is needed.
South Africa saw the ANC fall below 50 per cent for the first time, and they now need to form a coalition or at least agree on a confidence and supply model. Well, I would say that at this point, markets are already pricing a lot of that uncertainty.
Finally, in India, the BJP led New Democratic Alliance is set to form a government for the third term, and we think the most important aspect of this is policy predictability. And in particular we see a number of critical structural reforms made in this third term; and then importantly for fixed income, we see a reduction in the primary budget deficit.
We will continue to monitor closely the remaining emerging markets elections in this landmark election year, and we’ll come back with more investment updates.
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