Voters versus investors in South Africa, Mexico and India

Smart BTN Q3-24
Recent elections demonstrate how developing democracies must balance what voters demand against what markets will allow, writes Christopher Smart, managing partner of Arbroath Group.

Emerging markets have always been high on public investors’ lists due to higher long-term growth rates that should more than compensate for complex political dynamics and market volatility. Now, large developing countries may also serve as a haven from the mounting risks of sanctions, tariffs and export controls that the so-called ‘great powers’ seem increasingly eager to deploy.

However, even investors with long horizons have had their nerves tested by some of the recent electoral dynamics in key markets. Politicians, never satisfied with current levels of income or geopolitical power, run for office promising more of both. But voters demand more – either because they can no longer tolerate austerity that comes with balanced budgets or because they simply believe their country deserves better. This hope meets a harsh reality when financial markets make their own calculation of what’s affordable.

Consider the recent experience in South Africa, where on May 2024, the African National Congress suffered an even worse defeat than polls had predicted. Despite being the party that delivered a peaceful transition from apartheid 30 years ago, problems like unemployment, corruption and crime are all still high. When the results came in, investors fled as two leftist parties advocating for the nationalisation of key industries and redistribution of white-owned farmland exceeded expectations to become potential coalition partners.

Ultimately, politics and personalities drove the ANC to a surprising alliance with the right-of-centre Democratic Alliance, a traditionally white-dominated and business-friendly party. This alliance drove the stock exchange and the rand back toward 12-month highs. But the election exposed the dwindling patience of South African voters, who remain disgusted by stalled reforms and feckless-looking leaders. Investors were soon reminded that their vision of what’s good for the country is often far from aligned with what many voters have in mind.

In Mexico, there came a slightly different lesson as investors worried that voters had given the ruling party too much power. Claudia Sheinbaum, the heir apparent to current president Andrés Manuel López Obrador won as expected, but her landslide was a shocker. It raised concerns that her Morena party could push through significant changes to the constitution that would weaken the system’s checks and balances and threaten more government interference in the energy sector.

Investors, initially skeptical of López Obrador six years ago, had come to embrace his success at raising incomes while keeping the budget balanced. But they are sceptical of his party accumulating too much power. Sheinbaum was quick to promise she would respect private investment, maintain fiscal discipline and protect central bank independence and the market has rebounded for now. But markets may be jumpy through the fall, as López Obrador, still in office, can take advantage of his party’s legislative gains to drive through some of his more controversial reforms.

India’s election, which had been underway for weeks to record the votes of its 1.4bn people, triggered a similar market slump due to two-term Prime Minister Narendra Modi falling short of expectations. He was forced into a coalition with parties that might water down his ambitious reforms to bring the country into the ranks of developed economies by 2047 when it celebrates 100 years of independence. Over the last five years, the stock market has doubled.

Initially, it seemed the country’s fiscal policy might weaken as Modi bought off his new partners with expensive promises. But as the dust settled, investors returned, apparently deciding that voters had delivered an even better government. On the one hand, Modi looks very much in charge of catalysing economic reforms. However, the election result may also leave the prime minister chastened and perhaps less prone to some of his more impulsive moves against domestic rivals. Whether that bet proves accurate remains to be seen, but this may be a rare case when voters and investors may be more aligned than they realise.

More often than not, voters want more immediate spending to address their current problems, while investors are often happier deferring growth if it seems to make debts more sustainable. Of course, voters don’t want unsustainable debts either and investors welcome broadly shared prosperity when they can get it.

But the fact remains that both groups have very blunt and binary instruments. Should we hire or fire the government? Should we buy or sell the bonds? These recent elections will serve as a reminder to even the most seasoned public investor of the need to understand how voters and markets will answer these questions as they assess the long-term prospects of their holdings.

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