Elections and Silver Linings: Recent Surprises in Emerging Markets

Key Takeaways

• Mexico: Despite policy uncertainties and market overreaction, strong fundamentals make Mexican financial assets attractive.
• India: Modi's moderated third term offers stability and continued growth opportunities in quality and value equities.
• South Africa: The unexpected coalition government is a positive catalyst for equities and the Rand.

On a second thought, it might play out well after all…

Recent electoral outcomes in several emerging markets have defied expectations, creating both challenges and opportunities for investors. The common thread across these elections—Mexico, India, and South Africa—is the unexpected nature of the results, which has led to significant market reactions. While initial market responses have often been overdone, we believe a more nuanced view reveals underlying opportunities. In the context of a strong global economy amidst a fragile geopolitical context, Emerging Markets should continue to play a relevant role for investors and understanding implications from recent electoral outcomes will help shape the long-term view on whether EM can capitalize on the opportunities at hand. One other common thread across these three EM elections has been the ability of these democracies to transition to the next government or government coalition, relatively smoothly, even with surprising vote outcomes.

Mexico: Sheinbaum's Victory and Policy Uncertainty

A Wider-Than-Expected Margin Raises Questions

Claudia Sheinbaum's overwhelming victory in Mexico's recent elections has introduced new uncertainties. While Sheinbaum has signaled a commitment to fiscal responsibility and collaboration with experts, the Morena coalition's supermajority in Congress raises concerns about potential constitutional reforms that could erode political checks and balances.

Despite these risks, the market reaction appears overdone. Sheinbaum's reappointment of Finance Minister Rogelio Ramirez de la O and other competent cabinet picks have reassured investors. Mexico's strong fiscal position and nearshoring tailwinds continue to make it an attractive investment destination. Strong remittances should continue to support the economy, which is nearly 80% driven by domestic consumption. The country's strategic position as a nearshoring hub is increasingly important as global supply chains diversify away from China due to geopolitical tensions between China and the U.S.

In the weeks following the initial negative market reaction to the surprise election results, Mexico has since staged a +9% market recovery off of the lows. While the recovery has not and may not go in a straight line, with Mexico trading at ~11x NTM P/E, current valuations have already reflected a lot of political uncertainty and have room to continue to recover from here.¹

India: Modi's Third Term and Market Stability

Election Surprise Gives Way to a Blessing in Disguise

Prime Minister Narendra Modi's BJP party faced an unexpected setback, losing its outright majority in India's lower house of Parliament. However, the NDA coalition still holds a majority, ensuring Modi's third term. This outcome has introduced checks and balances, potentially moderating some of Modi's more controversial policies while maintaining a focus on pro-growth economic reforms.

The initial market reaction was negative, but this volatility opened a window for investors looking further into the country’s long-term prospects. India's economic fundamentals remain strong, with ongoing reforms driving growth. The upcoming fiscal budget will be a key indicator of the government's policy direction. Like Mexico, India is also benefiting from the global trend of diversifying supply chains away from China, further bolstering its economic prospects.

After the initial sell-off, India’s equity markets recovered within three days and continued to rally to all-time highs; year to date, India is now up +18%. While the election results were a surprise at first, the subsequent price action reflects the market expectation that the reform outlook and pro-growth policy trajectory would continue.²

South Africa: A New Political Landscape

Unexpected Coalition Brings Market Optimism

The recent South African elections delivered a surprising outcome that has significant implications for investors. The African National Congress (ANC), led by President Cyril Ramaphosa, lost its parliamentary majority for the first time in over three decades. Despite initial concerns, the formation of a "Government of National Unity" with the Democratic Alliance (DA) has been a positive development for markets.

The DA, traditionally seen as pro-business, has pledged to work with the ANC on economic reforms, job creation, and attracting foreign investment. This unexpected coalition has the potential to unlock value in South African equities, which are currently trading at a significant discount. The South African Rand has also rallied, reflecting improved market sentiment.

Since the end of May, South Africa’s equity market has rallied nearly +10% as the ANC was able to successfully forge a coalition government following the election with a renewed focus on market friendly policies.³

Conclusion

We Like the US, but Global Investors Should Still Pay Attention to Emerging Markets

The recent electoral surprises in Mexico, India, and South Africa underscore the importance of understanding political dynamics in emerging markets. For global financial investors, these insights are particularly relevant as they navigate a complex and interconnected world. Emerging markets are integral to global supply chains, economic growth, and investment opportunities. By staying informed and agile, investors can capitalize on the opportunities presented by these shifting political landscapes.

As we noted in our Mid-Year outlook, staying fully invested is key, but investors need to remain alert to potential risks to navigate the complexities of a strong global economy in a fragile world. Taking advantage of opportunities in disguise has the potential for enhancing portfolio returns, into the second half of 2024 and beyond.

Index definitions

• MSCI Mexico: The MSCI Mexico Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1987.
• MSCI India: The MSCI India Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1992.
• MSCI South Africa: The MSCI South Africa Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1992.

¹MSCI Mexico Index from June 12, 2024 to July 22, 2024.

²MSCI India Index from December 29, 2023 to July 22, 2024.

³MSCI South Africa from May 31, 2024 to July 22, 2024.