In India, Mexico, and South Africa, the incumbents held on to their positions as the largest political forces, consistent with most polls. The surprises came from the extent of support for Mexico’s Morena party, whereas voters rebuked Prime Minister (“PM”) Modi’s Bhartiya Janata Party (“BJP”) by stripping it of its parliamentary majority. While South Africa’s African National Congress (“ANC”) vote share was expected to dip below 50% for the first time in three decades, the party’s weak results (at 40.2%) opened the door to a wider range of possible alliances. Initially, the stock market reacted negatively in all cases. India quickly rebounded to new all-time highs and South African shares stayed rangebound, while Mexican stocks and the peso remained under pressure (see Figure 1).
In June’s Global Strategy Meeting (“GSM”), analysts and portfolio managers debated what the electoral results may mean for the investment outlook, governability, and policy paths in the three countries.
India: Policy Continuity on Track
Voters in India delivered a surprising blow to the ruling BJP, which lost its majority in the parliament by winning only 240 seats, trailing opinion polls and down from its 303 in the prior election. The initial market reaction was negative over concerns that PM Modi may struggle to effectively govern with coalition partners. The sell-off, however, was short lived as stocks rebounded to new all-time highs. While questions about governability and key cabinet names linger, the GSM speakers discussed that markets rightly perceived that the policy direction is unlikely to shift in any material way. Policy continuity means, among other measures, maintaining tax incentives to incentivize domestic production, pragmatic diplomacy, a focus on infrastructure spending, and cutting red tape – initiatives that contributed to making India the world’s fastest growing major economy and one of the best performing markets in the emerging markets space.
Participants pointed to several reasons for optimism about India’s policy direction. First, PM Modi managed to quickly secure the backing from his two regional partners, both of which are relatively moderate. Given their relative sizes – the BJP still has by far the largest presence in parliament – the cost of maintaining their support is likely manageable, with positive implications for governability. Second, many voters signaled concerns over the cost of living (see Figure 2) and unemployment, issues that seemed to take precedence over the cultural and religious ones that dominated the BJP’s campaign. The result, thus, may reinforce incentives to advance the pro-growth agenda that boosts employment. Lastly, while India delivered strong growth and return in recent years, there were also signs of some erosion in democratic norms. The vote should thus ease concerns over the centralization of power and potentially open the door for more collaboration with the opposition and local authorities. While an alternative scenario of more confrontational politics cannot be ruled out, speakers thought the most likely scenario involved more pro-growth policies with a slower pace of implementation because of the need to negotiate and find consensus.
South Africa: Renewal or Stagnation
Markets in South Africa – stocks, bonds, and the exchange rate, too – were relatively well-behaved after the ANC’s larger than-expected setback. GSM participants, however, agreed that the election may be the most consequential of the three because South Africa is entering a new era of coalition politics. Until the May 29th vote, the ANC held on to a comfortable parliamentary majority for three decades. The party’s choice of partners, indeed, will likely determine the outlook for the economy and markets. That outlook, speakers noted, seems binary given the sharply different policy stances of potential ANC partners and the weaker fundamental starting point for the economy. How politics and policies evolve from here could mean further reform progress leading to better growth, or it could set the country on a path of economic stagnation, capital flight, and eroding living standards, as someone flagged.
When the GSM took place, the ANC had announced that it was seeking to form a broad alliance. While such a government of national unity means President Ramaphosa stays in charge, speakers were concerned that it may not be a stable coalition because the platforms of two key partners have little in common: the populist Economic Freedom Fighters (“EFF”) talks about nationalizing mines and banks, whereas the center-right Democratic Alliance (“DA”) is pro-market and seeks to maintain central bank independence. The debate yielded no consensus on whether the ANC would put country or party first when the time came to decide between the two policy routes. Some thought a broad alliance was a pragmatic approach to bridge internal divisions for the sake of governability; others argued that it meant a lack of consensus regarding the urgent need to sustain the reforms seeking to address challenges with corruption, infrastructure, and joblessness. One area of agreement was investors should prepare for more uncertainty about policies and governability.
Mexico: Guardrails and Nearshoring
In contrast to the quick rebound in India’s stock market and the relative stability in South Africa’s, Mexican shares and the peso seemed unable to find a floor in the days after the June 2nd vote. While part of the sharp sell-off likely reflected an unwinding of very bullish positioning, the negative reaction also signaled concerns over the fallout to Mexico’s investment narrative from Morena’s landslide victory. After all, Morena’s victory of a qualified majority in the lower chamber and nearly achieving that in the senate – both unexpected – opens the door for constitutional changes that could jeopardize Mexico’s ability to leverage its near-shoring opportunity – a key anchor of investor optimism.
Analysts, portfolio managers, and a GSM guest speaker, who is a Latin America equity strategist at a well-known firm, saw a period of heightened uncertainty in coming months, during which asset prices will mainly react to news instead of fundamentals. The main concerns were initiatives seeking to undermine checks and balances and centralize power in the executive, principally the changes to the selection of supreme court justices and the undermining of independent regulators. The more immediate barrier to additional nearshoring-related investment is power generation – and weakening regulators, courts, and steps to favor the state-owned company would spook private capital. A second area of concern is fiscal accounts, since the executive already proposed (and failed to advance) measures that would lead to structural fiscal pressures, such as guaranteeing that minimum wages rose above inflation, additional pensions benefits, and other handouts. September, when the new congressional session starts while President López Obrador is still in office, will be critical, as well as the inauguration in October after which the president-elect will get a chance to show if she can act independently and break away from some of her predecessor’s policies.
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