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.
----- Transcript -----
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.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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