2024 is a big year for elections worldwide. With elections in 64 countries (plus the European Union), almost half of the global population who are eligible to vote will have that opportunity this year. There are more people voting in 2024 than in any prior year in history.
There were elections in Taiwan, Bangladesh and Pakistan earlier this year, and I’m sure that many of my viewers, just like me sat up late at night in March to see the ballots being counted in Russia wondering who would win. It was Putin… He won 88% of the votes this time...
In the last few days, we have started to see the effect elections can have on markets too. Claudia Sheinbaum won the Mexican election with a greater majority than expected, which caused the peso to fall 5% and Mexican stocks to fall 6% that day. The South African market held up well when the ANC lost its majority and in India we saw a real rollercoaster as the election results surprised markets. Next month we have an election in the UK, and then the US election in November.
So why did Mexico and India have such similar market reactions to very different election outcomes? Claudia Sheinbaum won with a greater majority than expected in Mexico, meaning that her party, which was already the ruling party, along with its allies can now secure the two-thirds majority they need to push through contested constitutional changes.
Markets fell after the Mexican result was announced, as investors worry that the government could dismantle checks on executive power and threaten the rule of law within the country.
The situation in India was extremely volatile, as to start with, the exit polls said that the current Prime Minister Narendra Modi would return and his party would have a strong majority, this drove Indian stocks higher, but then when the results came through it was revealed that Modi would have a reduced mandate causing the Indian “Nifty Fifty” index to fall almost 6% - a similar collapse to what was seen in Mexico – but for the opposite reason.
Stocks related to Gautam Adani; a close associate of Modi’s were hit the hardest as these companies benefit hugely from Modi’s big infrastructure programs. Adani Ports and Adani Enterprises both fell around 20% on the announcement.
The belief that Modi would win a huge majority in India had fueled a stock market rally, while when a huge majority was achieved in Mexico, it caused a massive selloff. The big difference between the two was the attitude of the majority government towards business and the governments agenda with regard to taxes and investment.
The narrower-than-expected victory for Modi raises questions about a coalition government’s ability to push through politically difficult reforms that might be necessary to sustain India’s economic growth, which in recent years has been the worlds fastest.
India has been one of the best-performing stock markets in the world for quite some time now, and even after the 6% dive, has outperformed US stocks over the last five years.
So, we have just seen three important emerging market elections, India, Mexico and South Africa with three big outcomes.
The South African election had the most muted market reaction, which is somewhat surprising. The election outcome was quite a blow to the ANC, who won far less of the vote than was expected. The ANC has been in power in South Africa since the end of Apartheid.
Their choice of coalition partner could lead to wildly different outcomes for South Africa. Investors appear to be counting on a coalition with The Democratic Alliance – the most business-friendly choice. Other options are Economic Freedom Fighters – who advocate mass nationalization and land redistribution and Jacob Zuma’s MK party who have significantly more radical economic policy ideas than the ANC.
South Africa is ranked as the most unequal society on earth by The World Bank, so the idea of wealth redistribution is quite popular within the country.
Investors expect a coalition with the Democratic Alliance as the president Cyril Ramaphosa has hinted that he prefers that option, but the Democratic Alliance is a predominately white party and does not appeal to everyone in South Africa. The country is in truth in a very uncertain position right now, where it could take two very different directions, depending on the coalition deal that is decided upon.
In India, Narendra Modi is set to remain India's prime minister for a third time even after election results saw his majority slashed.
Modi has found himself reliant on the NDA's smaller parties to reach a majority after falling short of the 272 seats needed to form the next government.
Indian media are now saying that Modi will push back his inauguration until Sunday while talks are ongoing with smaller allies who are making big demands for policy changes that would favor them or their regions in India.
Adam Tooze makes the point in his blog that the fact that Modi has to rule with coalition partners is not in itself unusual. The big question for markets is what a weaker Modi will mean for the infrastructure & oligarch-led growth model that has been his trademark.
Tooze points out that “contrary to the hype, investment in India (as a whole) has not really surged under Modi. As a share of GDP, investment is actually down from its high of 36 percent in the 2000’s, but government spending on infrastructure in India has hit record highs in recent years, and this spending has really benefited Indian owned businesses.
The market reaction to the Indian election results wiped out 25 billion dollars of Gautam Adani’s net worth in one day, which was the fourth-largest one-day decline in personal wealth in history. Only Elon Musk (on two separate occasions) and Mark Zuckerberg have seen larger one day losses in net worth.
The Indian economy has been booming, and India is projected by Jefferies to become the world’s third largest economy by 2027, surpassing Japan and Germany. The country has favorable demographics having overtaken China as the most populous nation last year. Unlike China and many other countries, India has a youthful population, with 65% of its population below the age of 35 and half of the population below the age of 25.
On top of this, India is a clear beneficiary of both the U. S’s friendshoring trend, and the China plus one supply chain trend, both of which emerged after the pandemic.
India’s inflation rate of 5.5% is relatively moderate too, compared to other major economies.
So why did polls get things so wrong in this recent election? When I asked my Indian friends about this, they joke that India can be thought of as being two countries, India and the Bharat.
Bharat is just the Hindi name for India, but it’s used by media in India to represent the other India. They refer to urban India as “India” as in “the place foreigners can recognize” while rural India is referred to as “Bharat” the parts of the country that are not exposed to the rest of the world and are often not well understood even by urban elites in India.
My friends explain that the media, and educated elites live in the cities and are all very pro Modi, and non-resident Indians – people who have moved abroad – are possibly even bigger fans of Modi as they look at the stock market, GDP and India’s international image. A farmer in rural India or “the Bharat” will have little interest in these economic measures as they don’t reflect his experience.
I guess it’s similar to the idea of the costal elites – and the flyover states that Americans talk about, but with much much more of a gap in terms of wealth, education, lifestyle and opportunities.
Modi’s campaign which focused on India’s rising economy and global status fell flat in these parts of the country where jobs are hard to find and hundreds of millions rely on government handouts to just get by.
According to Bloomberg, Indian voters who had previously supported the BJP were frustrated by an economic boom that created a billionaire elite but left 600 million ordinary people behind.
The BJP’s losses in its Hindi-speaking northern political heartland cost it the seats needed for an outright majority. Analysts say that in rural northern states like Uttar Pradesh where farmers have been protesting to demand government aid and guaranteed prices for their crops, many turned to other parties in this election.
It wasn’t just the rural vote… India is home to the second largest population of Muslims in the world, around 200 million people, who are a minority in the predominantly Hindu country. Modi has been controversial both at home and abroad for his Hindu nationalist beliefs and his alleged role in the 2002 Gujarat riots. He is accused of being anti Muslim and of having an exclusionary social agenda.
Historically Muslim voters used to split their vote amongst different (non BJP) candidates – but in this election they were more strategic, organizing to vote as more of a block for specific candidates so that their votes really mattered.
Analysts say that the weak election results might reduce the BJP’s nationalistic and ethnic messaging and draw the focus to broader issues like education and job creation.
Investors liked the idea of Modi being in charge because he is seen as being unapologetically pro-business. An Indian friend described him as being viewed as like an Indian version of Ronald Regan, who is conservative with old fashioned values and is very focused on economic growth.
Modi has a reputation for being quite bold in his actions, which sometimes works out, but at other times can lead to chaos. In 2016 he cancelled 86% of the paper currency in the country overnight as part of a crackdown on corruption, tax avoidance and counterfeiting. Millions of families were left stranded with no cash, people queued outside banks for days. Weddings were cancelled, small shops were shuttered, and economic activity was hugely disrupted. It’s estimated to have cost the country 1.5% of GDP.
It can be argued that it was somewhat obvious that a move like this would cause chaos in a country where 95% of all consumer transactions are conducted in cash.
In 2020 Modi made changes to farming laws in India which led to mass protests when farming incomes fell. Modi has additionally been accused of being thin skinned and of interfering with the press when they criticize him. Last year the Modi government banned a BBC documentary called India: The Modi Question which showed him in an unflattering light.
The FT writes that having lost his majority, Modi will now be reliant on his smaller coalition partners, with horse-trading required to thrash out a government in the coming weeks. They say that the good news for most investors is that the broader economic growth story of the past few years still looks intact. But that “Modi-affiliated” stock market darlings — such as Adani Enterprises (which is up 7000% since 2014), may have had their best days.
The investors that I talk to tell me that a big concern in India is that the regional politicians that Modi is now forced to deal with don’t really care about the national agenda or India’s standing in the world. They are regional politicians who want to fill own pockets (if possible) and to win special status and political favors for their states. The worry is that they are very regional and state oriented and are not overly concerned with the direction of the nation as a whole.
In 2013 the Indian Economy was in a bad state with high inflation, no growth and constant corruption scandals. When Modi took office the next year, the country turned a corner which is partially attributed to his pro-business policies and his ability to do deals with other politicians and get things done.
Modi has managed to do deals with opposition MP’s in the past stealing them from other political parties, and he seems to be very politically capable. For this reason he may still be able to keep his pro-business agenda on track.
An interesting fact that it’s worth noting is that Indian elections are unusually expensive to run. According to the Economist more money was spent on this election in India than was spent on the US election four years ago. Not only are election campaigns extremely expensive in India, but they seem to grow more expensive with each election. An Indian friend of mine argues that given the huge expense of running a campaign, once elected, politicians don’t want another election to happen for quite some time – so they might be more willing to strike deals and to stick to them as if they constantly obstruct progress – this could lead to chaos and bring about a new –very expensive- election.
Some of the decline in the Indian stock market was possibly a reversal of the rise that had occurred when investors had believed that Modi would win a strong majority. On top of that, the Indian stock market is quite expensive trading at 23 times forward earnings, which is at the top of its five-year range, and more expensive than US stocks. Some of the Adani owned companies are particularly expensive with Price / Earnings ratios in the 100’s.
Indian stocks partially recovered on Wednesday, suggesting that some of the panic may have been an overreaction. The Nifty 50 index of India’s top stocks closed up 3.4 cent having dropped 5.9 per cent on Tuesday.
The Indian economy has quite a lot going for it right now. To grow, a country needs people, capital and investment opportunities, all of which are available in India.
The emerging markets experts that I speak to tell me that India still has a lot of low hanging fruit. The country needs lots of infrastructure, which can be built profitably and when built can be expected to boost economic growth.
India is very different to China where if a new road is needed it will be built and people will be moved out of the way to get it done. Things move a lot slower in India and there is way more red tape, but the country has a much younger workforce than China and there is by no means an excess of unnecessary infrastructure like has been built in China over the last twenty years.
While the idea of friendshoring makes for good headlines, big international manufacturing projects are a small part of the story in India, instead there is a lot of organic growth in sectors that employ a lot of people and serve the local economy, in non-exciting business that are still needed.
China’s superpower in terms of manufacturing is its supply chain and its export driven infrastructure. China has state of the art factories, a workforce that really understands manufacturing and modern ports and transportation infrastructure that can bring in raw materials and export finished goods with great efficiency. No other rising economy will be able to compete with that any time soon and it would be unrealistic to expect India to compete on that front for quite some time, but that doesn’t mean that India wont grow in the coming years if it has a stable political situation where projects that benefit the whole country are not blocked for political reasons.
Manoj Pradhan of Talking Heads Macro – I’ll put a link to his twitter in the video description -says that as long as there is no panic, India’s economic strategy should remain reasonably steady – with some concessions for other parties in the NDA.
He doesn’t expect Modi to turn to economic populism to please rural voters as since Modi’s Gujrat days, he has never gone down the populist path. Manoj highlights that the “National Rural Employment Guarantee scheme” launched in 2005 was the Congress’s brainchild and was the key set of transfers that generated India’s twin deficits – which put India into the Fragile 5. Manoj doesn’t believe that Modi will waver from his business-friendly ideologies.
The Mexican election, unlike the other two was emphatic, but the markets didn’t like the outcome. Claudia Sheinbaum’s Landslide victory increased the chances that she could push through contested changes that eluded her predecessor, such as changing rules on the selection of supreme court judges and eliminating independent regulators.
The FT reports that Mexico’s finance minister tried to reassure investors in a hastily scheduled call on Tuesday that the leftwing government remained committed to fiscal discipline after its landslide election win. But traders continued to sell the peso on fears of radical constitutional change after voters handed a huge mandate to the president-elect. Investors panicked once the result was announced, fearing that the government could now remove checks on executive power and threaten the rule of law within the country.
The sell offs in both Mexico and India are not so much foreign capital fleeing a political situation that they don’t like, but local capital, concerned that the tides have turned. It is not easy for foreign investors to invest in India due to capital controls, but a growing number of Indian citizens now invest in their local stock market.
Indians have historically kept their savings in gold, which after real estate accounted for the biggest share of household wealth in the country. Over the last four years according to the Economist the number of Indian citizens who invest in the stock market has tripled and today there are more than 90 million unique brokerage accounts registered with the Indian stock exchange.
In the UK, the polls are showing a strong lead for the Labour Party, and in the US Trump is slightly ahead of Biden.
While people have lots of theories as to how different leaders will affect markets, they are often quite wrong. Their theories frequently relate more to their political leanings than to any deep analysis. In 2016 when Trump had a surprise victory in the US, markets initially tanked in the overnight session (S&P futures went limit down) only to rally later that day. For this reason, people are possibly a little reluctant to make big predictions about how the upcoming elections will affect markets.
It is my opinion that stocks will rise in either scenario, but I’d love to hear your ideas in the comments section below.
Thanks for tuning into today’s podcast. Before I go, I have a small request to make. If you find the podcast interesting and feel it brings valuable insights or entertains you, please consider writing a quick review and rating the podcast on Spotify or Apple. Each review helps new people find the show, increasing my ability to bring you more interesting content. Have a great day and talk to you again soon, bye.
