Our Global Chief Economist takes stock of recent elections in
India, Mexico and South Africa -- and what they suggest about the
market implications of the upcoming UK and US elections.
----- Transcript -----
Carpenter: Welcome to Thoughts on the
Market. I'm Seth Carpenter, Morgan Stanley's Global Chief
Economist. Along with my colleagues bringing you a variety of
perspectives, today I'll be talking about recent elections and
upcoming elections and what they mean for the economy.
It's Tuesday, June 11th at 10am in New York.
Markets usually prefer simple narratives, but this week it's
shown us that simplicity can be elusive. In particular, for
elections, legislative outcomes can be more complicated but are
consequential. Here in the US, clients often ask about the
economic implications of a Trump vs. Biden presidency -- but we
immediately have to flag that the congressional outcome has to be
a big part of the conversation.
Indeed, three important elections in the past weeks have
emphasized the importance of a legislative focus. But the
surprise was not in who won -- rather, in how big the legislative
decisions were.
In India, Prime Minister Modi was re-elected, but his BJP party
lost its outright majority. Exit polls on June 1st had predicted
a resounding victory for the BJP, prompting a rally in the lead
up to the final results.
The results surprised markets and caused a reversal. Markets have
since recovered to roughly where they were before the exit polls,
We expect policy predictability with the continued focus on macro
stability. This focus implies moderate inflation, smaller primary
deficits, along with support for domestic manufacturing and
infrastructure in upcoming years. Those have been the core of our
view that the Indian economy is set for continued expansion.
The Mexican election was almost the reverse, where the winning
candidate's party won far more votes than was expected. In
response to the news, equity markets sold off and the Mexican
peso depreciated. Scheinbaum was largely expected to win after
the endorsement of Obrador; but by winning a supermajority, the
market focus turned to Mexican fiscal discipline based on a view
that there may be less restraint on government spending.
Fiscal policy has been in focus for us because for the first time
in recent years the government there ran a fiscal deficit. While
the party has sought to reassure markets, concern has mounted
regarding the risks of fiscal slippage without a more balanced
legislature.
Compared to India and Mexico, The South African market reaction
to the election was modest, though not for a lack of surprise in
the legislature. The ANC lost more of its majority than polls had
predicted, which narrows the options for a coalition. The market
now expects a more reform-oriented coalition to take power and
support a continued improvement in the economy. For example,
frequent power outages had impeded the economy for a long time,
but the energy sector now appears to be more stable, and those
sorts of reforms can help catalyze an improved economic outlook.
Examples of India, Mexico, and South Africa have reinforced why
we've remained focused on the upcoming general elections in the
UK, and also the congressional outcomes in the US. In the UK, a
change in government is predicted by the polls, and fiscal
considerations will be in focus.
So back here in the US, the fiscal outcome will largely be
determined by the congressional results. To meaningfully change
federal tax or spending requires legislation. And our colleagues
in public policy research have flagged that under a Republican
sweep, they expect lower taxes and higher spending; contrasted
with a Democratic sweep that might bring somewhat higher
spending, but also higher taxes leading to a narrower deficit.
A split government, where the party in the White House not the
same as the party controlling each of the Houses of Congress,
however, probably implies more muted outcomes. While we should
focus on the legislative outcomes, there are important
authorities, of course, that the President can exercise
independently of the Congress.
So, when we highlight the importance of the legislative outcomes,
we are not denying the criticality of the presidency.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen to podcasts and share Thoughts on the
Market with a friend or colleague.
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