Emerging markets investors have had a bumpy week after surprising election results seem to have caught at least some traders off guard. Recent elections in India and Mexico were two of the most closely-watched contests in what is a packed year globally for voting, and the stock markets in both countries saw big swings in the aftermath of the initial election results. As the results are finalized and the changes take place, the countries could have a large impact on emerging markets exchange-traded funds, which have had a solid start to 2024. India 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. INDA 5D mountain 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. Angus Shillington, deputy portfolio manager on the active emerging markets team at VanEck, said Modi may have “overplayed his hand” in this election, but it probably doesn’t dent the economic story, at least in the short term. “There are a handful of [stocks] that are sort of closely-related to him that we would never touch in the first place, but I think the broad themes” of where an overseas investor wants to commit capital “have not changed dramatically,” Shillington told Tech Zone Daily. Indian stocks have since rebounded after initially selling off. From a technical standpoint, the rally appears to be largely intact, said Adam Turnquist, chief technical strategist for LPL Financial. “We’ve had what I would call a false breakout, but not a breakdown completely, when we look at the technicals for example on the Nifty Fifty” index of Indian stocks, Turnquist said. Mexico 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. Morgan Stanley’s Nikolaj Lippmann downgraded Mexico to equal weight from overweight in the firm’s Latin America model portfolio following the election. EWW 5D mountain 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. Joshi said that Sheinbaum seems more market-friendly than her predecessor but that the size of victory could allow Lopez Obrador to push through a broad package of reforms in September, when the new legislature is seated but the presidency has not yet changed hands. “That is the window of worry where, if he chooses to, he can get that entire 20-point package through Congress. That is what we’re concerned about. We’re much less concerned once Claudia takes over,” Joshi said. “Once you get through that risk, then you have U.S. election risk. Between now and Nov. 5 are almost all negative potential risks in Mexico,” Joshi added. Even if the party does have what is effectively a supermajority in the legislature, it is unclear if it will push through all of its plan, which includes both institutional changes and expanded social spending. “My hunch is [the proposals] are probably less likely to all materialize because the current government has to understand that fiscal prudence is one of the anchors for Mexico,” said Polina Kurdyavko, head of BlueBay emerging markets at RBC Global Asset Management. While Mexico equities have clawed back a lot of their losses since the election, the price chart is not encouraging, Turnquist said. “That would qualify as a pretty big breakdown. You had a gap below the 200-day moving average. I think when you look at, for example, the MSCI Mexico [index], you can make the case for a retest of the 2023 lows,” Turnquist said. Elsewhere in the world 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. “It’s a very large weight so it’s going to drive the emerging market index quite a bit. … You can have very different calls within emerging markets, but when you’re looking at the aggregate, China obviously matters a lot,” said Alejandra Grindal, chief economist at Ned Davis Research. 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. — Tech Zone Daily’s Michael Bloom contributed reporting.
