Emerging markets: why politics matter in 2018

Looking back: politics impact emerging markets

History suggests that political upheaval can impact emerging markets. In Mexico, financial crises in the 1970s, 1980s and 1990s all coincided with elections 1. For example, a month after President Ernesto Zedillo took office in December 1994, a peso devaluation drove the economy into crisis 2. Undoubtedly, a plethora of factors contributed to Mexico’s financial crisis, but two of the main drivers were tighter monetary policy in the US and political instability.

In Argentina, after spending the early 1990s cultivating foreign investment, contagion from financial crises in East Asia and Russia prompted investors to withdraw capital from the country by 2001. The currency peg became untenable, and the government unable to print money, borrowed it instead. President Fernando de la Rúa resigned on 20 December 2001, and five presidents took the helm in just two weeks amid widespread riots 3. By the end of the year, the country defaulted on its $155bn public debt.

In December, markets welcomed Cyril Ramaphosa’s victory as leader of the African National Congress, billionaire Sebastian Piñera’s win in the second round of the Chilean presidential election and the victory of the Bharatiya Janata Party in the state of Gujarat, which saw Indian Prime Minister Narendra Modi’s party claim a sixth consecutive term in in his home state.

Meanwhile, market reactions to political events can be unpredictable, as evidenced from Lula da Silva’s Brazilian presidential victory in 2002. The prospect of a win by leftist candidate Lula da Silva unnerved markets in the final weeks of the election campaign. However, following attempts to assuage investors’ fears, the real rallied by almost 4% and the risk premium on the country’s bonds dropped in the month that followed the election result.

Gary Greenberg

Here Gary Greenberg, CFA – Head of Emerging Markets, dissects political risk in emerging markets:

Ramaphosa’s victory in the ANC leadership race in December offers South Africa a shot at real reform. The market moved quickly to discount a Ramaphosa government in the immediate aftermath of his ANC leadership victory, as it is expected that under his leadership investment should pick up, along with sentiment, and bond yields should drop further. However, the market has since surrendered some of those initial gains. Despite his victory, life in South Africa will remain difficult, as the transition to a middle-income economy is daunting, and social discord remains high.

In Russia, Putin will win the presidential election. The struggle for succession in the mid-2020s has already begun, but it is too soon for the market to discount a likely outcome. Meanwhile, in Columbia, the FARC will join the government, which is a good thing in some ways as an important section of the electorate will now be part of the political process. But it will herald the arrival of a radical leftist party in the Congress.

Elections in Mexico could herald a big change in policy. As such, there is cause for concern. The market is well aware of the risk of a MORENA government but is thus far unwilling to discount it. We are underweight at this point, waiting for a cheaper entry point that discounts the potential problems.

Meanwhile, the return to democracy in Thailand could mean a resumption of federal spending, which could kick-start the country’s growth cycle. Investors may decide to return to the market, but the strong baht is harming exporters.

Going to the polls

More important elections are yet to come, the following article highlights some of those investors should pay attention to in emerging markets over the next 12 months.

Click here:  https://www.hermes-investment.com/sg/blog/perspective/emerging-markets-politics-matter-2018/

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