Overview
Elections often move markets. In 2024, eight of the world’s 10 most-populous nations – the US, India, Brazil, Indonesia, Bangladesh, Mexico, Pakistan, and Russia – go to the polls in the same year for the first time ever. More than 50 countries are electing governments1. So, we can reasonably expect FX volatility.
Voting takes place in the Global North and South, across developed and developing markets. More than two billion people are entitled to cast ballots. Depending on where we look, we might see ideologies reshaping economies, challenges to institutions, polarisation by region or market, new assessments of debt, and deep ebbs and flows of trust.
Adopting a crystal ball is unwise, in this environment or any other. There is no clear and obvious recipe for portfolio positioning around elections. Some markets can take time to price in the outcome. Others can move rapidly. Some emerging market (EM) countries choose to intervene directly in their currency market to counter volatility. Others choose not to. Because of the variable responses, and generally better liquidity, FX markets are often the best way to express views or hedge positions in and around elections.
What we also know is that FX volatility presents a source of potential alpha. So, we are alert to the factors we can see and source around every election which might influence our markets. We are alert, also, to what we might learn from the past.
We have undertaken historical analysis of FX performance covering close to 100 elections across over 20 EM countries2. This suggests there is significant alpha potential given heightened dispersion. For example, in the six weeks into and out of an election, the average FX move of both the top and bottom quartiles is around 3.5% higher and 3.5% lower than the broader market returns.
With that in mind, we have produced this piece to help investors navigate this year. The year of the ballot.
To be sure, nothing is certain, because the impact of each election will vary, depending on the country and its existing economic and political conditions. In our own analysis, we often handle election uncertainty by plotting scenarios, with estimated probabilities. Keeping them live as news updates. Mispriced assets often emerge with this simple yet intuitive process. Our analysis below considers ballots likely to have a high, medium or low impact on emerging market risk assets and also summarises elections that have already taken place.
The elephant (and donkey) in the room is the mightiest nation of all. The election in the US. That is where we begin.
1 Source: World Economic Forum.
2 We have excluded elections that do not represent genuine prospect of political change (e.g Russia, some sub-Saharan African countries) or in markets where the exchange rate is pegged.
Election overviews
The impact of each election will vary, depending on the country and its existing economic and political conditions. We have broken down the analysis into three distinct sections. The first covers ballots likely to have a high impact on emerging market risk assets. The second covers ballots likely to have a medium impact. The third is a summary of ballots with an anticipated low impact. We also summarise outcomes of elections that have already taken place and elections where results either have been or are likely to be heavy landslide victories in favour of the incumbent, given a lack of democratic representation.
United StatesPopulation 333.3 million3Date 5 November |
High impact |
Background
The highly anticipated US election turned into an impossible-to-predict race between the Democrats (Kamala Harris) and Republicans (Donald Trump), with most polls pointing to a very close result. In the end, Donald Trump secured victory. Republicans have taken control of the US Senate and – at the time of writing – look set to keep their majority in the House, which would produce a full sweep for the party in Congress.
In the run-up to the election, volatility in fixed income markets centred around the potential implications for tariffs and the US Treasury market (relating to US fiscal policy direction) – the key transmission channels for EM sovereign markets from the US election. Specifically, Trump’s election campaign pointed to the following potential implications:
- Trade: Trump floated a plan to impose a 10% tariff on all imports (vs. current average 3%), aiming to incentivise US domestic production. He also threatened a blanket 60% tariff (or more) on imports from China. Even if Canada and Mexico are exempt under the United States-Mexico-Canada Agreement, this would be a major escalation of US trade protectionism, increasing tensions with major trade partners. India and Indonesia would likely be net beneficiaries relative to the rest of Asia, particularly China.
- Geopolitics: Trump threatened to withdraw all military and financial support for Ukraine. He stated that he could push for Ukraine to negotiate an end to the war with Russia, implying it should accept the loss of land currently under Russian occupation.
Our thoughts on the election result
Ultimately, both the current Democrat presidency and Trump have had a mixed market impact in their respective terms, and our team has navigated the uncertainty through a focus on bottom-up best ideas that complement the overall top-down view the team has through the market cycle. We will continue to adopt this approach.1
The short-term reaction to the election result has seen market participants price key themes/outcomes related to Trump’s expected policy path:
- An anticipated rise in growth and inflation, led by the US economy, is evidenced by rising yields in the US Treasury market – relating to higher fiscal spending and deregulation – and the US dollar strengthening. This has boosted high-yielding asset markets (pushing down credit spreads in riskier parts of the bond market).
- Concerns around trade tariffs have caused some European and Asian markets – primarily manufacturing-heavy economies – to underperform.
- An expected shift in gear on the geopolitical front has boosted Ukrainian and Israeli bond prices, reflecting the view that Trump will try to expedite peace deals with the respective regimes.
On tariffs, markets seem to be in wait-and-see mode. While Trump’s rhetoric on tariffs has been tough and alarming, what happens in practice is yet to be seen, making it difficult to gauge – and price – the size and scope of eventual tariffs. That the market reaction has not been stronger makes sense in the context of Trump’s previous term in office: what he threatened differed significantly from his eventual policy, including the trade relationship with China.
It is also important to note that Biden’s administration upheld many of Trump’s trade policies, meaning markets and economies have had eight years to adjust to a more protectionist US regime and markets have largely positioned for an ongoing tense relationship between China and the US. Broadly, almost a decade of US protectionism and increased polarisation of the global economy is not a new theme and global supply chains have already adjusted. Furthermore, China’s domestic policy is more important for the country’s economic growth than any policy moves by Trump. However, it will be important to monitor potential exemptions to trade tariffs for the most exposed economies, including Mexico and parts of Central and Eastern Europe.
In that vein, and crucially for active investors, even if trade is squeezed in some emerging markets, others will benefit – outside of South-East Asia, parts of Central America are already benefiting from nearshoring, for example. These trends look set to continue; the risk is that there’s a shock around the scale of protectionism and the size of tariffs.
The path of the dollar
As noted above, the market’s short-term reaction to Trump’s ‘America first’ policy is seen via the continuing strength of the US dollar. A strong US dollar is not helpful for emerging market assets, but it is something investors have been dealing with for a decade now.
Longer term, the path of the US dollar is less certain and likely to be less linear, not least because of the many contradictions in Trump’s policy agenda and parts of his administration that are actively calling for a weaker dollar to boost the domestic manufacturing sector.
Portfolio positioning
The short-term outlook – reflecting growth-friendly policy in the US and continued easing in global liquidity conditions – favours higher carry and higher yielding markets. We are taking a selective approach in FX markets given the uneven impact of tariffs and uncertainty around these. In rates markets, there are still plenty of economies where combination of high real (inflation-adjusted) interest rates and benign inflation outlook means that EM cutting cycles across select markets is likely to continue into 2025, creating a positive outlook for bond prices in these markets into 2025.
1 For more information on investment process, please see Important information section.
General Risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
