How recent elections are shaking up investments in emerging markets

In South Asia, Indian Prime Minister Narendra Modi has declared victory in his re-election campaign, but it seems that his party lost seats in parliament. Indian stocks have been a global outperformer under Modi, and his the weaker-than-expected result seemed to spook some traders. The iShares MSCI India ETF (INDA) fell 6% on Tuesday as the results became clearer.

The popular iShares India index fund suffered a steep one-day drop after an election this week. Still, many investment professionals who closely watch India do not think the underwhelming performance for Modi’s party will do much to hurt economic growth. “India is not new to the concept of a coalition government and has seen stable coalitions in the past. Naturally, in a coalition, consensus building can potentially delay big bang reforms, but not derail it,” Bank of America India economist Aastha Gudwani wrote in a June 5 note.

South of the U.S. border, there was a similar situation where the favored candidate won, but the margin was a surprise. Claudia Sheinbaum won the presidency, following her mentor Andres Manual Lopez Obrador. But the performance of the Morena party was stronger than expected and could put it close to a large enough majority in the legislature to pass constitutional changes. The initial market reaction was negative. The iShares MSCI Mexico ETF (EWW) fell 10% on Monday after the initial election results, and the peso dropped sharply against several major currencies.

This Mexican stock fund had a brief 10% drop this week. The impact of the election could hang over Mexico for months, depending on exactly how many seats the ruling party ends up controlling, according to Arif Joshi, a portfolio manager on Lazard Asset Management’s emerging markets debt team.

There are other lingering political issues that could affect emerging market investing. For example, South Africa appears headed for a coalition government after its recent election, though the results are still unclear, and the economic changes in Argentina under president Javier Milei may not have had their full impact yet. And for investors in broad emerging markets funds, even positive developments in some of these countries can be overshadowed by what happens in China.

The global interest rate environment is also a factor, as high interests rates in the U.S. put pressure on emerging market currencies and can make it more expensive for those countries to borrow or roll over old debts. “For the EM rally to continue, the Fed needs to be on pace for what the market is already expecting, which is that September cut,” Joshi said.

To be sure, some emerging markets “gained a lot of street cred” by hiking rates faster than the Federal Reserve when inflation broke out after the pandemic, which could give them more flexibility now, Grindal said.
— CNBC’s Michael Bloom contributed reporting.