Emerging market investors have had a volatile week with at least some traders seemingly caught off guard by unexpected election results. The recent elections in India and Mexico were two of the most closely watched in a year packed with votes globally, and stock markets in both countries have been highly volatile following the initial election results. Once the results are finalized and changes are made, both countries could have a major impact on emerging market exchange-traded funds (ETFs), which have had a strong start to 2024. India In South Asia, Indian Prime Minister Narendra Modi has declared victory in his re-election campaign, but his party appears to have lost seats. Indian stocks have outperformed globally under Modi, and the weaker-than-expected election results appear to have scared some traders. The iShares MSCI India ETF (INDA) fell 6% on Tuesday as the election results became clear. INDA 5D Mountain The popular iShares India index fund fell sharply in one day after this week’s election. Still, many investment experts watching India don’t believe Modi’s party’s disappointing performance will have much of a negative impact on economic growth. “India is not new to the concept of coalition governments and has seen stable coalition governments in the past. Of course, in a coalition government, consensus building can slow big bang reforms, but not prevent them,” Aastha Gudwani, economist at Bank of America India, said in a June 5 note. Angus Shillington, deputy portfolio manager for VanEck’s active emerging markets team, said Modi may have “overdone it” in this election, but that it would not hurt the economy, at least in the short term. “India has a few parties that could hurt the Indian economy. [stocks] Shillington told CNBC that while he mentioned areas that are quite relevant to him, which he would not touch on initially, the “broad theme” of “areas where foreign investors want to put capital” “I don’t think it’s changed dramatically.” Indian stocks have since rebounded after an initial sell-off. Adam Turnquist, chief technical strategist at LPL Financial, said that from a technical perspective, the rally seems to be pretty much intact. “When you look at the technicals, like the Nifty Fifty index for Indian stocks, there was what you might call a false breakout, but it didn’t break down completely,” Turnquist said. South of the U.S. border, Mexico saw a similar situation, with a favored candidate winning, but by a surprising margin. Claudia Sheinbaum succeeded her mentor Andrés Manuel López Obrador as president. But the Morena party’s performance is stronger than expected and could bring it closer to a large enough congressional majority to pass constitutional reforms. Initial market reaction was negative. The iShares MSCI Mexico ETF (EWW) fell 10% on Monday after the initial election results, and the peso slumped against several major currencies. Morgan Stanley’s Nikolai Lippmann downgraded Mexico to equal weight from overweight in his firm’s Latin America model portfolio after the election. EWW 5D Mountain This Mexico stock fund was down 10% at one point this week. The fallout from the election could affect Mexico for months, depending on how many seats the ruling party ends up winning, said Arif Joshi, a portfolio manager on Lazard Asset Management’s emerging markets debt team. Joshi said that while Sheinbaum seems more market-friendly than his predecessor, the size of the victory could allow Lopez Obrador to push through a broad reform package in September, when a new Congress is formed but the president has not yet been replaced. “That’s the worrying moment. If he wanted, he could pass the whole 20-item bill through Congress. That’s what we’re worried about. If Claudia is in power, we’ll be much less worried,” Joshi said. “Once you get past that risk, then the next one is the US election risk. From now until November 5th, there’s almost every potential downside risk in Mexico,” Joshi added. Even if the party wins a de facto supermajority in Congress, it’s unclear whether it will push through all of its plan, which includes both institutional reforms and increased social spending. “My hunch is [the proposals] “It’s unlikely that all of these policies will come to fruition, because the current administration has to understand that fiscal prudence is one of the key pillars for Mexico,” said Polina Kurdiyavko, head of emerging markets at RBC Global Asset Management’s BlueBay.Mexican stocks have recouped a lot of their losses since the election, but the stock charts aren’t encouraging, Turnquist said. “I would say this is a pretty big drop. We’re below our 200-day moving average. If you look at the MSCI Mexico index, for example, [index]”We could see a retest of the 2023 lows,” Turnquist said. Elsewhere in the world, political issues remain that could affect emerging market investing. South Africa, for example, appears to be heading for a coalition government after recent elections, but the outcome is still unclear. And economic reforms in Argentina, led by President Javier Milley, may not have had their full impact yet. And for emerging market fund investors, even positive developments in some of these countries could be overshadowed by what’s happening in China. “That’s a very big weighting, so it’s going to drive the emerging market index up quite a bit. “There are very different views within emerging markets, but when you look at it as a whole, it’s clear that China is going to have a big impact,” said Alejandra Grindal, chief economist at Ned Davis Research. The global interest rate environment is also a factor, with higher U.S. interest rates putting pressure on emerging market currencies and making it more expensive for these countries to borrow and refinance old debt. “For the emerging market rally to continue, the Fed needs to match the pace of September rate cuts that the market is already expecting,” Joshi said. To be sure, some emerging markets may have more flexibility now because they “gained a lot of credibility” from raising rates faster than the Fed when inflation erupted after the pandemic, Grindal said. — CNBC’s Michael Bloom contributed reporting.
