CONTRIBUTORS
Robert O. Abad
The upcoming elections this year in emerging markets (EM) hold significant importance for global growth, trade stability and international relations. In this post, we'll spotlight two key EM elections: Mexico and India. These countries are attracting considerable investor interest, and the results of their presidential and legislative elections can greatly affect broader EM market sentiment.
Mexico: June 2, 2024
Election Type: Presidential and Congressional
What’s the backstory?
Andrés Manuel López Obrador (AMLO) and his Morena Party swept into power in 2018, promising to combat corruption and implement sweeping reforms to transform Mexico’s economy. Their victory marked a win for the Left and an end to decades-long rule from the political establishment. AMLO’s populist stance initially rattled investors both domestically and internationally, leading to increased volatility in Mexican financial and currency markets. Despite his ambitions, AMLO struggled to garner sufficient political support to enact key legislation, such as fully repealing a 2013 law that opened Mexico’s energy markets to foreign investment. Additionally, his pet infrastructure projects, including a new military airfield, a Gulf Coast refinery and the Maya train line, failed to boost economic growth.1 Recently, the International Monetary Fund (IMF) revised down its economic growth forecast for Mexico in 2024 to 2.4% from 2.7%, citing weaker-than-expected outcomes. The IMF also reduced its 2025 growth projection for Mexico to 1.4% from 1.5% in January.2 Despite lost opportunities as a result of AMLO’s policies, remittances and robust portfolio flows led to strong currency appreciation. While Mexico's fiscal situation has deteriorated at the margin, we assess that a ratings downgrade below investment-grade is not an immediate concern. Furthermore, ongoing disinflation and trends favoring nearshoring suggest positive prospects for the Mexican economy over the long term.
What do we expect in these elections?
With a solid 59% approval rating, we anticipate that Claudia Sheinbaum, the Morena Party candidate, is well positioned to clinch victory in the June 2024 presidential election. We’re closely monitoring the outcomes in both houses of Congress, where a two-thirds majority by Morena would grant Sheinbaum the authority to pursue constitutional changes, particularly in cementing state control over the power sector.3
We view the upcoming presidential transition as a positive development for both foreign and domestic investors. First, a Sheinbaum presidency is an opportunity for a reset with the business community, particularly as we view her to be more pragmatic and less contentious compared to AMLO. Second, we anticipate her administration will prioritize strengthening trade relations with the US and enhancing Mexico’s potential for nearshoring. It’s worth noting that Sheinbaum lacks the same level of popularity and legitimacy as does AMLO. Consequently, we do anticipate some initial governance challenges in the early months of her tenure, especially considering Mexico’s near-term financial constraints. 4
Exhibit 1: Mexico’s 2024 Presidential Vote—Poll Tracker
Source: Oraculus. As of April 9, 2024. There is no assurance that any estimate, forecast or projection will be realized.
How are we playing the Mexico story?
We’re constructive on Mexican local government bonds yields due to nominal and real yields being at or near historical highs. With the Bank of Mexico currently in an easing cycle, we’re adopting a slightly more tactical approach regarding the Mexican peso at its current levels. This decision is influenced by the peso’s sustained appreciation since mid-2022, upcoming Mexican and US presidential elections and changing expectations regarding US monetary policy easing.
India: April 19-June 1, 2024
Election Type: Parliamentary
What’s the backstory?
Narendra Modi assumed office as India’s Prime Minister in 2014, following a historic victory by the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA). Modi’s platform centered on anti-corruption and Hindu nationalism, drawing support from many Indians. His successful tenure as chief minister of Gujarat state, India’s fifth-largest state with over 60 million people, bolstered his reputation for economic prowess amid India’s slowing growth. Despite challenges during his first term, including economic downturns, a controversial tax evasion program and rising youth unemployment, Modi led the BJP to another overwhelming victory in 2019.5 Since then, India has experienced significant economic growth, rebounding strongly after the pandemic to become one of Asia’s fastest-growing economies and a global power, serving as a counterweight to China. In April 2024, the IMF revised India’s growth forecasts upward. The growth forecast for 2023-2024 was raised to 7.8% from the previous 6.7%, and for 2024-2025 to 6.8% from 6.5%.6 India currently maintains a solid investment-grade rating, supported by a surplus in balance of payments, moderate inflation, and strong foreign direct investment (FDI) and portfolio flows, contributing to a strong external position. Moreover, India ranks among the top five globally in foreign exchange reserves, boasting an impressive $643 billion.7
What do we expect in these elections?
We anticipate Modi securing a third term as Prime Minister once the votes of nearly 970 million people are tallied and the results are announced on June 4. Modi currently holds the highest approval rating among global leaders, backed by significant campaign resources and a robust on-the-ground voter recruitment effort. As of early April, the BJP appears positioned to win the majority of the 543 seats in the Lok Sabha (Lower House). However, it’s expected to be a challenging contest, with polls indicating voter dissatisfaction due to increasing unemployment and rising inflation. It’s worth noting that Modi and the BJP are aiming for a supermajority (two-thirds of the seats) in this election. Such a victory would enable Modi to enact major constitutional changes, including the implementation of the “One Nation, One Election” agenda, which proposes holding national and state elections simultaneously to streamline the electoral process and focus on economic development.8 India’s opposition party has voiced concerns about Modi’s growing power, highlighting a perceived erosion of free elections, an independent judiciary, media freedom and the peaceful transition of power during his 10-year tenure. Moreover, they’ve cautioned against Modi’s potential use of supermajority power to promote Hindu nationalism, which could potentially undermine India’s secular foundation.9
Exhibit 2: Top Five Domestic Approval Ratings Among World Leaders
Source: Morning Consult. March 28-April 3, 2024; % respondents; Ratings reflect a seven-day moving average of views among adults in each country surveyed. As of April 3, 2024.
How are we playing the India story?
India currently offers the highest bond yields among the nine largest Asian economies excluding Japan, making it a standout choice from a relative value perspective. Notably, foreign holdings in the Indian bond market represent less than 1% of the total outstanding bonds, indicating a lesser susceptibility to global market fluctuations. Given this scenario and the attractive carry relative to peers, coupled with strong technical tailwinds due to inclusion in JP Morgan’s GBI-EM Index, we believe India’s local bonds are poised to outperform this year.10 Consequently, we currently favor a mix of Indian government bonds, INR-denominated supranational bonds, and the Indian rupee (INR).
Endnotes
- “Mexico's Lopez Obrador Pledges Legal Rollback of Energy Overhaul”, Bloomberg, March 15, 2017 and “Mexico Tries to Turn Back the Clock on Energy”, Foreign Policy, October 4, 2019
- International Monetary Fund, World Economic Outlook, April 2024. There is no assurance that any estimate, forecast or projection will be realized.
- “Mexico’s Leading Presidential Hopeful Would Tighten State Grip on Power Sector”, Bloomberg, January 5, 2023
- “Challenges to Sheinbaum’s Fiscal Policy”, Wilson Center, February 16, 2024
- “Why India wiped out 86% of its cash overnight”, BBC, November 14, 2016
- International Monetary Fund, World Economic Outlook, April 2024
- Reserve Bank of India, April 12, 2024
- “What is ‘one nation, one election’ and what are its pros and cons”, Times of India, September 1, 2023 and “Indians vote in the first phase of the world’s largest election as Modi seeks a third term” Associated Press, April 19, 2024
- “Here’s what you need to know about the world’s largest democratic election kicking off in India”, Associated Press, April 18, 2024
- Indian bonds will eventually hold a weight of 10% in the index, following 1% additions to its weightage each month starting in June 2024.
Definitions:
The nominal yield is the coupon rate on a bond.
The real yield of a bond is the annual growth minus the rate of inflation.
Carry is the income from a coupon-paying bond minus the cost of funding.
Supranational bonds are debt instruments issued by supranational organizations, which are institutions created by the governments of several countries to promote economic, political, and social cooperation.
The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.
WHAT ARE THE RISKS?
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.