2024 is ‘not a normal year’: Key political elections loom for emerging markets
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The U.S. isn’t the only game in town when it comes to elections in 2024, as several emerging market countries head to the ballots. Taiwan, Mexico, India and South Korea are among the countries set to hold presidential, legislative or local contests in 2024. These votes come after a generally strong year for these markets. Taiwan’s Taiex index has surged nearly 25% year to date, while the Mexican S & P/BMV IPC index has climbed 19%. India’s S & P BSE Sensex index is up 17% in that time, and the Korean Kospi index has advanced more than 15%. Indonesia’s JSX index is only up 5.4%, but that still outpaces the broader iShares MSCI Emerging Markets ETF (EEM) , which is up just 4.4% in 2023. But next year’s elections could make it more difficult for these markets to maintain their momentum, as investors fret over the potential election outcomes — and their impact on each country’s business and economic backdrop. “Next year is not a normal year for EM politics. Of the 27 EM economies we cover, 11 will hold national or local elections in 2024,” HSBC emerging market strategist Edward Parker wrote earlier this month. “With so many economies headed to the polls, the potential for a change of direction in policy is higher. … And elections could also, of course, have significant market implications.” Taiwan Taiwan will hold its presidential and legislative elections on Jan. 13, and the result could intensify tensions with China. Polls show Taiwan Vice President Lai Ching‑te leading the race, but only by a slim margin . A Lai victory would prolong the ruling of the pro-independence Democratic Progressive Party. “After eight years in power, the US-leaning nationalist DPP is under pressure as a result of geopolitical tensions and a weak economy, which has been exacerbated by a prolonged slump in the chip cycle,” wrote Rory Green, head of China and Asia research at TS Lombard. “The election will go down to the wire and there will be volatility during the run-up to the January vote.” The election comes amid heightened tension between the U.S. and China. President Joe Biden and Chinese leader Xi Jinping met in November for the first time in about a year as both leaders tried to ease relations between the world’s biggest economies. But Taiwan remains a delicate subject for both countries. Beijing sees Taiwan as part of its territory. At the same time, the U.S. has unofficial relations with Taiwan. In 2022, then-House Speaker Nancy Pelosi, D-Calif., visited Taiwan . The trip was met with fury from China, which held military drills around the same time. A DPP victory could also be a headwind for major U.S. tech companies, Green added. He noted such a result would “exacerbate cross-strait tensions and further raise the geopolitical risk premium for Taiwanese assets and related supply chains,” adding that Taiwan Semiconductor ‘s 10-biggest customers make up nearly a quarter of the Nasdaq — including Apple and Nvidia . That said, U.S. investors looking to gain exposure before or after the election can do so through the iShares MSCI Taiwan ETF (EWT) . The fund, which has an expense ratio of 0.58%, is up 10% in 2023. EWT YTD mountain EWT in 2023 Mexico Mexico is set to hold presidential, legislative and local elections on June 2. According to December data from Mexican pollster Mitofsky , Claudia Sheinbaum is the clear frontrunner, with 61.4% of voters signaling the would vote for the former Mexico City mayor, her party or coalition. Sheinbaum belongs to Morena, the same political party as current President Andrés Manuel López Obrador. Given Sheinbaum’s massive lead, Bank of America thinks investors will focus more on the congressional election outcome. “A qualified majority for Morena would increase the risk of a more radical govt. An opposition-controlled congress would increase checks & balances,” strategist led by David Beker wrote last month. The election comes amid a nearshoring boom, with many U.S. companies moving operations and supply chains away from Asia in favor of Mexico. In October, Mexico was the U.S.’ top trading partner, Census data shows . “Investment surged 32% yoy in real terms in August, the largest monthly gain in 30 years,” Bank of America said. “Investment is driven by private investment in machinery and equipment and non-residential construction in the North, which we associate with nearshoring, as well as by government non-residential construction in the South.” “Investment was an important driver of the above-trend growth that Mexico has seen in recent quarters. Investment could also increase Mexico’s potential GDP,” the bank said. For investors looking to invest around Mexico’s election or nearshoring boom, they can look at the iShares MSCI Mexico ETF (EWW) . The fund has an expense ratio of 0.5% and is up 37%. EWW YTD mountain EWW in 2023 South Korea South Korea’s legislative election is slated for April 10 and comes after the president’s People’s Power Party was dealt a blow in a district election. Jin Kyo-hoon, a former police deputy commissioner, won an election to lead the Gangseo district for the opposition Democratic Party of Korea. If the President Yoon Suk Yeol’s party fails to secure a majority in the country’s legislature, it could make it harder for his administration to move forward on key legislative items and budget negotiations. However, strategists at MRB Partners think South Korean stocks are primed for outperformance in the new year as global trade picks up. “With semiconductor and electronic goods demand improving, earnings will materially recover in 2024, and ensure that Korea outperforms in an EM equity portfolio,” they wrote. U.S. investors can gain exposure to the South Korean market via the iShares MSCI South Korea ETF (EWY) . The fund is up 12% year to date and has an expense ratio of 0.58%. EWY YTD mountain EWY in 2023 Indonesia and India Indonesia is set to hold its presidential and legislative elections on Feb. 14, with local contests slated for Nov. 27. India is scheduled to hold legislative and local elections between April and May. Frontrunner Prabowo Subianto holds a wide lead in the contest, according to an Indikator Politik Indonesia poll conducted between Nov. 23 and Dec.1. If no candidate wins a majority, the election will head to a run-off in June. Citi strategist Helmi Arman said the election cycle could bolster domestic demand, as “various social expenditures could … be frontloaded throughout 1H24.” That said, “the fiscal deficit will still be well anchored thus, a spending hangover may occur in 2H24 where consumption growth subsides as a result of FY budgets already being largely spent.” In India, incumbent Prime Minister Narendra Modi’s right-wing Bharatiya Janata Party and its allied parties are expected to retain a majority in the country’s lower parliament house. Against this backdrop, MRB Partners is heading into 2024 with the recommendation that clients be overweight India. “There are signs that private investment is picking up which will sustain the cyclical capex recovery even as public investment inevitably moderate,” MRB said in a note Tuesday. “Moreover, the consumer spending recovery will remain intact and thus overall earnings will continue outperforming within an EM context.” Investors who want to invest around the Indonesian and Indian election can do so via the iShares MSCI Indonesia ETF (EIDO) and the iShares MSCI India ETF (INDA) , which tracks the Indian market. The EIDO is down 2% year to date and carries an expense ratio of 0.58%, while the INDA has gained 14.6% and has an expense ratio of 0.64%. EIDO INDA YTD mountain EIDO and INDA year to date What about the U.S.? To be sure, investors with exposure to emerging markets must also pay attention to the U.S. election. Indeed, the outcome of that contest could bolster, or complicate, relations between the U.S. and each of these countries. The U.S. general election will be held Nov. 5. – CNBC’s Michael Bloom contributed reporting.
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