How recent elections are shaking up emerging market investing | Wilnesh News
Emerging market investors have had a rough week after the surprising election results appeared to have caught at least some traders off guard. The recent elections in India and Mexico were two of the most closely watched global polls of the year, with stock markets in both countries seeing sharp swings following the announcement of preliminary results. As results are finalized and changes occur, these countries could have a significant impact on emerging market ETFs, which are already off to a strong start in 2024. Narendra Modi declared victory in his re-election bid, but the party appears to have lost seats in parliament. Indian stocks have outperformed globally under Modi, and his weaker-than-expected performance appears to have unnerved some traders. The iShares MSCI India ETF (INDA) fell 6% on Tuesday as the outcome became clearer. INDA 5D mountain The popular iShares India Index Fund suffered a sharp one-day drop following this week’s general election. Still, many investment professionals who follow India closely don’t think Modi’s party’s lackluster performance will have much of an impact on economic growth. Aastha Gudwani, India economist at Bank of America, wrote: “India is no stranger to the concept of coalition governments and has had stable coalition governments in the past. Of course, in coalition governments, the Consensus could delay big-bang reforms but not derail them, said Angus Shillington, deputy portfolio manager in VanEck’s active emerging markets team, who said Modi may be “pushing too hard” in this election. “But that probably won’t weaken the economic situation, at least in the short term. “There are some (stocks) that are closely tied to him that we wouldn’t touch on initially, but I think there are broad themes that overseas investors want to put money into. There hasn’t been a huge change,” Shillington told CNBC. Indian stocks have rebounded after an initial sell-off. Adam Turnquist, technical strategist at LPL Financial, said that from a technical perspective, the rally appears to be largely intact. “When we look at technicals like the Nifty Fifty index of Indian stocks, we’re seeing what I call a false breakout, but not a full collapse,” Turnquist said. There’s also been a breakout in Mexico south of the U.S. border. In a similar situation, the favored candidate wins, but by an unexpected advantage. Claudia Sheinbaum won the presidency after her mentor Andres Manual Lopez Obrador. But Morena’s party’s stronger-than-expected performance could bring it closer to a sufficient majority in the legislature to pass a constitutional amendment. The initial market reaction was negative. The iShares MSCI Mexico ETF (EWW) fell 10% on Monday after preliminary election results were released, and the peso fell sharply against a variety of major currencies. Following the election, Morgan Stanley’s Nikolaj Lippmann cut Mexico’s weight in the firm’s Latin America model portfolio from overweight to equal weight. EWW 5D mountain This Mexican stock fund briefly fell 10% this week. The fallout from the election could hang over Mexico for months, depending on how many seats the ruling party ultimately controls, said Arif Joshi, a portfolio manager in Lazard Asset Management’s emerging markets debt team. Joshi said Sheinbaum appeared to be more market-friendly than her predecessor, but the size of the victory could allow Lopez Obrador to push for a broad reform package in September, when the new legislature takes office. The presidency has yet to change hands. “This is a worrying window, if he wants to, he can get Congress to pass the entire 20-point package. That’s what we’re worried about. Once Claudia takes over, we’re less worried,” Josh explain. “Once you get past that risk, then you have the risk of the U.S. election. Mexico is almost a negative potential risk between now and November 5,” Joshi added. Even if the party does secure a solid majority in the legislature, it’s unclear whether it will push through all of its plans, including institutional reforms and expanded social spending. Polina Kurdyavko, head of emerging markets at Royal Bank of Canada Global Asset Management BlueBay, said: “My hunch is that it is unlikely that all of these proposals will be realized because the current government must understand that fiscal prudence is One of the pillars of Mexico. Turnquist said that while Mexican stocks have recovered most of their losses since the election, the price chart is not encouraging. “This is going to be a pretty big collapse. The gap is below the 200-day move. average. I think when you look at the MSCI Mexico (index), for example, you can retest the 2023 index lows,” Turnquist said. There are other lingering political issues elsewhere in the world that could impact emerging market investing. South Africa, for example, looks set to form a coalition government after recent elections, although the outcome remains unclear, while economic changes under President Javier Milley in Argentina may not yet have their full impact. For investors in broad emerging market funds, even positive developments in some of these countries may be overshadowed by what’s happening in China. “It’s a very large weighting, so it will drive the emerging markets index a lot… There may be very different views within emerging markets, but when you think about the overall picture, China is clearly important,” He said. The global interest rate environment is also a factor, as high U.S. rates put pressure on emerging market currencies and could make it more expensive for those countries to borrow or roll over old debt. “In order for emerging markets to continue to rebound, the Fed needs to keep up with what the market is already expecting, which is a rate cut in September,” Joshi said. To be fair, Greendal said, some emerging markets are raising interest rates faster than when post-epidemic inflation breaks out. The Fed thus “gains a lot of street credibility,” which could give them greater flexibility. —CNBC’s Michael Bloom contributed reporting.
