Wrapping Up Early 2024’s EM Election Flurry

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The results are in! India’s ruling party won a much narrower than expected victory in the just-concluded general election, while Mexico’s reaped a larger-than-expected landslide. Stocks didn’t welcome either result, but we wouldn’t get hung up on short-term moves. What really matters: Major Emerging Markets (EM) elections are now done for the year, clearing the way for falling uncertainty to be a broad tailwind.

In Mexico, the Morena party’s Claudia Sheinbaum won as expected. As outgoing President Andrés Manuel López Obrador’s (AMLO’s) hand-picked successor, she is the continuity candidate and—as a former Mexico City mayor—also enjoys strong name recognition. But she won a larger margin than polls indicated was likely.

More importantly, Morena defied polling expectations to win a near-supermajority in the legislature. Given polls indicated the opposition would be a much larger force against radical legislation, markets had to price higher legislative risk in a hurry. They seemingly did so, with the MSCI Mexico down -6.2% in pesos (-8.8% in dollars) on Monday.^[i]

Meanwhile, in India, with the gradual national voting process concluded, Prime Minister Narendra Modi has sealed a third term. But his National Democratic Alliance (NDA) coalition fared worse than expected, winning just 286 seats in the 543-seat legislature. That narrow majority is down from its 332 seats in the previous term. Modi’s Bharatiya Janata Party won only 240 seats—down from an outright majority, 303 seats in 2019’s election.

This will likely force him to compromise on legislation. Given markets had high hopes for a thumping NDA majority to deliver structural reforms, the results brought a dose of reality and disappointment: The MSCI India fell -6.4% in rupees (-6.8% in dollars) on Tuesday.^[ii]

So in one major EM nation, we have markets disappointed over a higher likelihood of big legislation than expected. And in another, we have disappointment over the potential for gridlock. In our view, both seem overwrought to varying degrees.

Take Mexico. Yes, Morena being just four seats shy of a supermajority theoretically makes it easier to pass some of the more radical measures AMLO couldn’t push through, including reversing some of the energy liberalization prior governments accomplished in the 2010s. But as we wrote last month, the more contentious measures would require constitutional amendments. That takes not only a legislative supermajority, but also state approval. Mexico’s court system is also a bulwark against radical measures, as AMLO learned during his term.

So yes, legislative risk is higher. But it is also a known factor, and there is still some sand in the gears. Meanwhile, Mexico’s economy is growing nicely, benefiting from manufacturing “nearshoring” and strong economic ties with the US. And with social issues and cartel violence likely taking a lot of Sheinbaum’s immediate agenda, it isn’t clear radical economic measures will get top billing early. To the contrary, continued growth may force her to court more private investment than expected, raising the potential for positive surprise.

As for India, we have long thought hopes for further reforms during a third Modi term were too far-fetched. Yes, his prior governments did much to modernize India’s economy and woo investors with business-friendly measures. But as we wrote in the election’s runup, his first two administrations picked nearly all the low-hanging fruit. For this election, his campaign platform was very light on reform.

About the best investors could rationally hope for was an emphasis on fiscal prudence, infrastructure spending and increased investment. Fine things, but also well-known to Indian stocks, which have had a monster run of late. If markets are at all efficient, these widely discussed fiscal policy plans are almost surely priced. In our view, Tuesday’s selloff shows investors may now realize they got too far over their skis.

That isn’t a bad thing. In the medium term, a BJP-led coalition should be a fine thing for India’s economy and markets. It extends the status quo and keeps uncertainty low, which stocks generally like. Infrastructure-related firms got hit especially hard Tuesday, showing investors’ hopes sank fast. If this represents a broader sentiment reset that rebuilds some wall of worry, tamer expectations should form a fine backdrop for Indian stocks—even with more gridlock. 

More importantly, we should now get global tailwinds from falling uncertainty in EM more generally. Elections were front-loaded in this year’s first half. Taiwan selected a new president and legislature in January. South Korea held legislative elections in April. Then came India’s marathon vote throughout May. South Africa voted at May’s end, delivering a hung Parliament and probably a lengthy coalition formation process. And Mexico rounded out the pack this weekend. But now we are done! Once South Africa’s coalition is formed, investors will know who is in charge where and what the policy challenges and opportunities are.

While this might seem specific to EM stock returns, we think it also benefits developed-world companies. In this globalized world, multinationals from North America, Europe and Australasia have operations throughout Emerging Markets. They have factories and supply chains. And they have big sales presences, especially in markets where incomes and social mobility are on a tear.

Falling political uncertainty in these supply chain links and markets lets developed-world businesses plan and invest with confidence, aiding their growth. When you own multinational stocks, you own that growth. And now there is less political uncertainty to deter the risk taking that fosters it.