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May 02, 2024
Emerging markets managers eye impact of U.S. presidential contest amid pivotal elections across the globe
In a year that is unprecedented in terms of its number of national elections — with roughly half of the world's adult population due to go to the polls by the end of 2024 — money managers are keeping a close eye on results and the effect of those votes on emerging markets in particular.
Managers said they will be watching for the potential impact of votes in Mexico, India and South Africa on emerging markets assets, adding that, in order to preserve returns, the financial sector may need to both appreciate long-term risk and understand what immediate turbulence can be caused by national elections.
Ted Mann, Ariel Investments
But by far, the dominant viewpoint that emerged during money manager interviews is that the most significant election this year for emerging markets is not happening among developing countries at all: rather, they're most closely watching the U.S. presidential contest between incumbent Joe Biden and challenger Donald Trump, slated for November.
"The market is probably cheering” for a Biden re-election, said Thierry Larose, a portfolio manager in the emerging markets bonds team at Vontobel Asset Management, which has CHF 103.3 billion ($113 billion) in assets under management. The last few years under Biden's tenure have been “relatively friendly” for emerging markets assets, while the expectation is that the policy platform would be more “predictable” than a return of Trump to the White House, Larose said.
However, in the four years of the Trump administration, the MSCI World Markets index only showed a fall in annual performance in one year, dropping 14.57% in 2018, a year before the emergence of the COVID-19 global pandemic. In the three full years of the Biden administration, two have shown annual performance declines in the same index (-2.54% in 2021, and -20.09% in 2022).
This data underlines that a Trump victory may not be all bad for emerging markets. Damian Bird, head of the emerging markets growth team at the $66 billion Polen Capital, noted that for all the anti-China rhetoric espoused by Trump during his first presidential campaign, starting in his first year in office in 2017, the MSCI China index returned 36% — “completely counter to what one might have expected.”
“Experiences like this have taught us to be wary about being too strong on predicting exactly how these election outcomes will move (capital) flows," Bird said. With this in mind, and in spite of any disruption that may or may not happen with a Trump victory in the U.S. election, Bird feels there are still “phenomenal” opportunities for investment in the Chinese market, with the nation retaining “very interesting” structural growth. Polen's emerging markets team is marginally overweight in China, having taken these factors into account.
"As we think about investing in China, the risks are significantly greater for companies that have a model that requires growing by exporting to the U.S."
Ted Mann, a senior research analyst on the emerging markets team at Ariel Investments, which has about $15 billion in AUM, noted that the emerging markets team is overweight on domestic equities located in China. Furthermore, this is a position they intend to hold regardless of the outcome of the U.S. election.
"As we think about investing in China, the risks are significantly greater for companies that have a model that requires growing by exporting to the U.S. For firms with more of a domestic market, we're comfortable that these risks are quite moderate, even though you certainly will see the (anti-China) rhetoric and policy actions pick up" in the U.S. election campaign, he said.
Elections and inflation
The impact of an election can be closely linked to the strength of a nation’s currency, something to keep a particularly keen eye on in fixed income. For example, this relationship was key to understanding the Argentina election, held last year.
Won by firebrand Javier Milei, so far he has taken an aggressive anti-inflationary stance described as “hawkish” by Larose, who at Vontobel oversees local government bonds denominated in local currencies.
Milei's actions in Argentina may be beneficial to emerging markets investors in the short term, such as stopping the printing of money in an attempt to bring inflation down, Larose said. Vontobel has a small exposure to local government bonds in Argentina.
“Not all elections will have a deep impact on an investment, but some occurring this year such as in the U.S. or South Africa are much more uncertain. We can expect the risk premium of assets (in these jurisdictions) to be repriced before the election. In South Africa, we have seen the valuations being priced with a wider risk premium precisely because of the growing uncertainty about the outcome and what kind of coalition can emerge from the country’s May election,” Larose said.
Dogged by years of economic woes and corruption allegations, South Africa's ruling African National Congress faces a potentially bruising general election. In its aftermath, it may need to enter into a coalition government with a reduced majority.
A strong showing in South Africa's election by the Economic Freedom Fighters — an opposition party with a Marxist-Leninist platform — would not signal the nation’s investment potential to emerging markets managers such as Larose, who describes the EFF as "about as market unfriendly as you can think."
Larose said he "recognizes the uncertain outcome of the elections" in South Africa, but also believes that local asset government bonds display a "fair risk premium."
India's impact
Since elections do not take place in a vacuum, attention should be paid to the wider economic factors at play before making investments or withdrawing from the emerging markets asset class.
India, the most populous nation on earth, is set for its largest election this year. Beginning on April 19 and ending on June 1, the voters will decide the makeup of the Lok Sabha, India’s lower chamber of parliament, which in turn chooses the nation’s prime minister.
However, a victory for incumbent Narendra Modi and his Bharatiya Janata Party is widely anticipated. Of the election’s effect on the markets, Peeyush Mittal, a portfolio manager at investment manager Matthews Asia ($9 billion AuM), sees limited impact.
“Elections are something which continue to occupy a certain mindshare of all investors. The expectation here is that Modi comes back to power and comes back with full majorities (in all chambers). If that happens, the Indian election will likely be almost a non-event," Mittal said, speaking on a "Why The Engine of Emerging Markets are Roaring In India" webinar on March 28. “Yet if opposition were to surprise, it'll be a negative surprise for the market, and you should expect to see some sort of a correction.”
Overall, Mittal sees significant investment opportunities in India, with the country showing “buoyant” growth and conferences held within the country showing high levels of attendance by foreign investors.
Matthews Asia runs an India Fund that is composed of at least 65% stocks and securities located within the country, and its primary benchmark is the S&P Bombay Stock Exchange 100 index. Since its inception in 2011, it has delivered an 8.35% overall average annual return.
However, while Polen Capital's Bird understands the “phenomenal” investment opportunities in India, the current overall returns potential for the country has him feeling more downbeat: “If you just picked 20 stocks at random in the Indian market and held them for five to 10 years, I’d actually be very surprised if you did well in terms of investment returns, just given the elevated levels of in valuations at the moment," he said. “You need to be very, very selective in India, you need to remain true to the fundamentals of investing, which means being disciplined on valuation. We actually are underweight in India today, because we think the valuation backdrop is too challenging."
Mexico
On June 2, Mexico will go to the polls to elect a successor to the largely popular incumbent Andrés Manuel López Obrador, who has reached his term limit. He leads the left wing Juntos Haremos Historia coalition, and their nominee for the election, Claudia Sheinbaum, is widely tipped to win and in doing so would become Mexico’s first female president.
As in India, Mexico’s election takes place against a backdrop of wider economic opportunity in the nation's markets.
“Mexico has a very well established and technocratic set of institutions: the central bank, the finance ministry, and so on," said Kristin Ceva, a managing principal specializing in emerging markets debt at investment management firm Payden & Rygel, which has $162 billion AUM. "The country has also been able to get out of a low growth rut and for the last couple of years has been really improving on that front.”
Data from the International Monetary Fund shows that Mexico's real GDP grew 5.7%, 3.9%, and 3.2% in 2021, 2022, and 2023, respectively, although that growth rate is predicted to fall to between 1.4% and 2.1% from 2025 onwards.
For Ceva, a Sheinbaum victory also means fiscal continuity, and even a level of outright fiscal conservatism that was seen in the previous administration, which dispelled fears that an undue amount of tax dollars would be spent on Obrador's "pet projects," according to Ceva.
Payden & Rygel is overweight Mexico, seeing particular value in corporates and local markets. However, Ceva said that the firm "may decrease its allocation somewhat" if Scheinbaum’s party does better than expected in Congress as there may be "lower fiscal guardrails" in that scenario.
Mann notes that Ariel is underweight in Mexico, even as he expresses excitement over areas such as the country's nearshoring activity, with industry moving from markets in Asia to Mexico, and in 2023 reclaiming its place as the No.1 nation exporting to the U.S.
"At the end of the day, we just find better opportunities elsewhere. The stocks that we look at in Mexico are not particularly compelling in terms of valuation.", he explains.
While a Sheinbaum-led victory is likely, what is perhaps of more interest to the markets is how this will affect legislation, if not immediately then still within the six-year presidential term, said Anthony Kettle, a senior portfolio manager within the emerging markets team at RBC BlueBay Asset Management, which has $432 billion in AuM.
“Mexico in general has a lot of debt outstanding, particularly in the corporate world. So any change in government policy which can impact the corporate sector can be very meaningful,” Kettle said, specifying something such as a shift to greater sustainable energy investment.
RBC BlueBay is currently overweight Mexican corporates, and Kettle does not see that changing in the near term.