• Elections matter – resulting policies can either strengthen or disrupt investment narratives.
• Polls provided little guidance on intentions of voters, who prioritized economic issues and turned on incumbents’ failure to deliver.
• Mexico’s ability to fully leverage the nearshoring opportunity is at risk, while South Africa is taking steps in the right direction, and policy continuity seems likely in India.
A month after election surprises in South Africa, India, and Mexico, the consequences for investors are becoming clearer. The unexpectedly large setback for South Africa’s ruling African National Congress (“ANC”) party opened the door to a wide range of potential coalition and policy outcomes. The ANC’s decision to seek a partnership with the main center-right party – and to eschew populist alternatives – likely sets the country on a path of further reform progress necessary to end its prolonged growth slump. In India, the incumbent also lost its parliamentary majority; after an immediate dip, markets quickly rebounded on the perception that the ruling coalition would maintain its pro-investment policy mix. Unlike the relative optimism in India and South Africa, uncertainty over future policy is keeping Mexican markets jittery (see Figure 1). The surprisingly strong congressional showing by the incumbent Morena party gives it space to advance controversial constitutional changes, which risk deterring investment, in the legislative session starting in September.
While the investment implications of the votes are different in each of the three countries, there are some common lessons for emerging market (“EM”) watchers. First, in all cases voters seemed to prioritize economic issues, such as the cost of living, over other considerations. The second common thread is that elections matter, playing an important role in shaping the investment narratives that anchor markets. Last, these contests are a reminder of the increasingly unpredictable nature of elections.
From India to Mexico, the economy played a central role in voters’ decisions. The more obvious of the three examples is South Africa, where voters expressed their discontent with a ruling party that presided over years of economic stagnation, rising joblessness, and eroding living standards. Shocks like the pandemic played a role, but so did mismanagement and corruption that resulted in rolling blackouts and failing transport infrastructure. During the five years ending2023, South Africa’s 0.1% per year growth clip placed it at the bottom of major EM economies.
India’s brisk expansion – up8.2% in fiscal year 2024 – masked a fair degree of concern over economic conditions among voters. In one survey, 62% of participants thought that it was harder to get a job today than five years ago, with 71% pointing out that prices were higher; importantly, most put the blame on both the central and local governments. When asked about the factors driving their electoral choices, unemployment (27%) and price rises (23%) were the top issues, far ahead of the cultural and identity matters that the incumbent often emphasized during the campaign (see Figure 2).
Mexico, where voters handed a surprisingly strong mandate to Morena, is enjoying near record-low unemployment; the government also boosted handouts to the poor and more than doubled the minimum wage in real terms (see Figure 3). And while the economic value of many of the executive’s infrastructure projects is questionable, policymakers focused spending on the country’s less-developed southern states.
Another lesson for investors is that elections matter, particularly if the resulting policy paths can alter investment narratives. The investment case for Mexico rests on several pillars, including an independent Supreme Court and nearshoring. After winning a qualified majority in the lower house and approaching that threshold in the Senate, the current administration is likely to have the numbers to advance controversial reforms that seek to undermine the Supreme Court, the electoral institute, and regulators, while adding structural fiscal pressures. If successful – uncertainty will remain high for months – these initiatives have the potential to discourage investment and prevent Mexico from fully leveraging its position as an attractive nearshoring destination.
The immediate aftermath of India’s vote was marked by investor concerns over governability and a possible shift in the pro-investment policies – such as tax incentives for exporters, infrastructure spending, and pragmatic diplomacy – that helped turn India into the world’s fastest-growing major economy. Yet the incumbent Bharatiya Janata Party (“BJP”) quickly formed a government with a cabinet that signaled continuity while appearing to satisfy coalition dynamics; a return to coalition politics, moreover, should also ease concerns about the centralization of power. The next budget, likely to be unveiled in late July, will be important to gauge commitment to gradual fiscal consolidation, particularly because voters’ dissatisfaction with jobs and inflation may prompt a rethink of welfare policies.
The stakes were highest in South Africa as the government’s configuration could have set the economy on very different paths – involving further reform efforts with prospects for growth upside or taking a populist, anti-market turn that could lead to crisis. We believe the deal between the ANC and the pro-market Democratic Alliance(“DA”) (plus eight other smaller parties) represents an important step in the right direction. The cabinet appointments came short of the bullish scenario of the DA controlling ministries related to the economy and production (it got deputy minister positions instead), a move that may have been required to hold the coalition together and address internal ANC divisions. And while risks to governability and reform slippage persist, the political class so far is showing the pragmatism necessary to address the country’s growth challenge.
The sharp post-vote swings in asset prices also reflect the rising unpredictability of elections. In all three cases polls missed the mark by a wide margin, providing limited guidance to investors. Surveys in South Africa indicated that the ANC – which ended up with just 40% of the vote – would dip slightly below the 50%threshold, allowing it to easily form a government with support from small parties. India’s BJP was widely expected to win by a landslide, with some analysts even predicting a qualified majority based on solid results fromlate-2023 local elections and PM Modi’s high approval. Mexico’s final batch of polls in late May gave President-elect Sheinbaum a 21-point edge; in the final tally, she came in 33 points ahead of the joint-opposition candidate. Alternative signposts such as surveys of consumer confidence also provided mixed signs at best: in India, for example, confidence is running high, masking popular concerns over bread-and-butter issues.
The outperformers also seemed to capture frustration with the establishment and voters’ willingness to punish them – trends seen elsewhere from Argentina’s presidential contest to Turkey’s local vote this March. In India and South Africa, incumbents underperformed despite advantages provided by their positions, opening a new phase of greater fragmentation and more uncertain coalition politics. In Mexico the opposite took place, yet the ruling Morena party again positioned itself as ananti-establishment alternative, critical of the neoliberal model and its institutions.
For markets, elections can have profound consequences. Secular narratives often trump cyclical considerations, and elections can result in policies that either strengthen or disrupt these longer-term narratives. Mexico’s ability to take advantage of the nearshoring trend is at stake, while in India it comes down to consolidating the pro-investment policy mix that anchors its upbeat growth prospects. The policies endorsed by the government coalition give South Africa a chance to break from its long spell of stagnation and market underperformance.
Luis Arcentales
luis.arcentales@rohatyngroup.com
Luis has over 20 years of experience in covering global macroeconomics and markets. He is responsible for formulating market strategy at TRG. Prior to joining TRG, he had a short stint as an independent macro researcher following a nearly two-decade career at Morgan Stanley in New York. In his role as Senior Economist, his primary focus was developing the macroeconomic and political outlooks for countries in Latin America, in addition to publishing on topics ranging from the business cycle to trade dynamics for the region. Luis started his career as an equity strategist at McGlinn Capital, a value-oriented asset manager in Pennsylvania. He holds an MS in Economics and a BA in Industrial Engineering from Lehigh University; he sits on the board of Lehigh’s Martindale Center for the Study of Private Enterprise and is a CFA charter holder.
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