Updated to include our views on India's and Mexico's election results.

The year of the ballot

Elections often move markets. This year, eight of the world’s 10 most-populous nations go to the polls in the same year for the first time ever. FX markets are often the best way to express views or hedge positions in and around elections, and FX volatility presents a source of potential alpha. We have produced this piece to help investors navigate this year. The year of the ballot.

6 Jun 2024

25 minutes

Overview

The year of the vote
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 States

Population 333.3 million3
Date 5 November

US

High impact
Background

The looming US election – likely to be the first rematch in 70 years – presents a potential source of market instability across the world, not just emerging markets. A Trump presidency opens up a wide array of policy scenarios, potentially including further tax cuts, more stringent immigration measures, and further protectionist trade measures - particularly regarding China. The challenger is also facing 91 criminal charges across four separate prosecutions, leading to speculation of civil disobedience if he doesn’t win, and politicisation of key establishments if he does.

Potential implications
  Trump Biden
Ukraine Trump has threatened to withdraw all military and financial support for Ukraine. He has 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. Biden would continue to show support for Ukraine. However, there is likely to be moderation in the amount of financial and military support that the US will provide.
Middle East The US will maintain its long-standing alliance with Israel under either administration. The potential for escalation in Iran would increase under Trump. The long-standing alliance with Israel will continue, though pressure would remain to keep a lid on regional tensions.
China/Taiwan Although both administrations will continue a focus of ‘out competing’ China, Trump’s return would bring more direct, tense disagreements in the short term. A Trump presidency is also likely to increase uncertainty around Taiwan. A continued Biden administration would produce a more predictable trend towards “decoupling”. Biden has confirmed that the US would defend Taiwan in the event of a Chinese invasion.
Trade Trump has floated a plan to impose a 10% tariff on all imports (vs. current average 3%), aiming to incentivize US domestic production. He has 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. There is downside risk in oil-importing countries if geopolitical uncertainty pushes up oil prices. More of the same, Biden is unlikely to change any of the existing trade relationships with the US.

Potential policy shifts under a Biden or Trump second term

Potential policy shifts under a Biden or Trump second term

Note: Policies in red indicate those likely under Donald Trump; policies in blue are likely under Joe Biden. Source: Economist Intelligence Unit. Please note this chart has been redrawn by Ninety One.

Our thoughts

We remain constructive on EM risk assets ahead of the US election. A Trump presidency is likely to bring the return of additional market volatility and uncertainty that was experienced in his first term. Ultimately, both presidents 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.


3 Source: All population figures are sourced from the World Bank, as at 2022, unless otherwise stated.


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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.

Authors

Nicolas Jaquier
Thys Louw
Roger Mark
Mark Evans
Emily Patton

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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