LONDON (Reuters) – A shake-up of heavyweights South Africa, Mexico and even India in recent days has proved beyond doubt that policy can still deliver a windfall in major emerging economies.
Mexico’s peso and South Africa’s rand were both still lower on Tuesday after their respective election surprises, while the prospect of Narendra Modi not scoring a landslide victory in India’s marathon election sent its stock markets sprawling. .
The peso fell 1.5% to just 18 to the US dollar at one point as traders continued to worry about the fallout from the resounding victory for the MORENA party led by Claudia Sheinbaum and its allies in Sunday’s Mexican election.
That took its decline in recent days to nearly 5% and means June is currently on track to be the worst month for the peso since a 17% drop at the start of the COVID-19 pandemic in March 2020.
South Africa’s rand, which has also been hit by the prospect of a potentially strained coalition government after a poor election showing by the ruling ANC party, fell another 1.3% as well, to extend its week’s decline to last at about 3.5%.
“This is all a reminder of the importance of political risk events,” said Graham Stock, senior emerging market sovereign strategist at RBC Bluebay Asset Management.
“You go into these events with a base case, but if you underestimate the tails and they materialize, then that will surprise market participants.”
Taiwan, Pakistan, Indonesia, Russia and Turkey have all held important elections this year, but this week’s three have sparked the most dramatic market reactions yet.
Indian stocks tumbled almost 6% on Tuesday in what was their worst fall since the outbreak of the COVID-19 outbreak – an even more jarring move after they hit record highs on Monday.
With more than half of the votes counted from the election that began in April, Prime Minister Modi looked set to lose his majority, raising questions about whether the new alliance he leads will have to spend more on welfare measures than on key infrastructure projects and reforms.
Analysts at brokerage Emkay Global said tough but potentially beneficial changes to land and labor policies, along with the privatization of some of India’s biggest state-owned firms, were now “off the table”.
The worries had also pushed up India’s government borrowing costs in bond markets, while the rupee fell 0.5% against the dollar, which, while not seismic, was its biggest drop in 16 months.
“India’s stock market reaction today was the classic shock where people got too excited,” Ashmore Research head Gustavo Medeiros said, referring to recent records.
International investors have been buying into both India and Mexico over the past year or two as an alternative to China, meaning they had been susceptible to a sell-off, he added. But he said it was reassuring that there had not been a real “climb” across EM.
As for Mexico, he warned that the “window of greatest concern” may still lie ahead.
In September, outgoing president Andres Manuel Lopez Obrador will be in his final weeks in power and may try to use MORENA’s new “supermajority” to push through previously rejected constitutional changes.
The election campaign in the neighboring United States will also ramp up and Kieran Curtis, who heads EM local currency debt for the EM-focused fund manager, thinks now is the big vote to watch in analyzing emerging markets.
With the unpredictable Donald Trump promising tough new trade tariffs and tough US-first policies against China, as well as other swings if he regains power, it will be crucial.
Curtis said that with most of the big EM elections over, the US was the key vote to watch, noting that as it would be very populist and have some major debt issues , the contest itself had some EM-like characteristics.
“That’s going to be the one that everybody’s really going to be watching after this month,” he said.
(Reporting by Marc Jones, editing by Karin Strohecker)
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