Why are elections important to investors?
For anyone investing in emerging or frontier market economies elections are usually market-moving events – more important than big economic data releases. This is because economic data in emerging/frontier countries can be unreliable and too backwards-looking. So while GDP growth rate numbers are usually headline news, their impact on both equity and currency markets are muted since they are already considered yesterday’s news. This is true of developed markets as well, where non-farm payrolls in the US is the most focused on event on the economic calendar due to its forward-looking nature, while GDP releases barely cause a reaction in stocks.
This is why elections are so important – they can represent a drastic change in policy and economic direction in a country that the market cannot price in until after an event. A perfect example of this is India, which held its general elections in 2014. Narendra Modi’s BJP party won a crushing victory in an election that was thought to be very tightly contested. The resulting euphoria from his win pushed the Sensex equity market up almost 30% in 2014, with the market jumping immediately after his win and rallying 20% from the middle of May when the results were announced. While this reaction was particularly strong given how well loved he is currently and how little the market had priced in a victory, it is clear that elections are events that need to be considered by every frontier market investor.
Elections to watch in 2015
By our count there are currently 29 national elections being held in the world in 2015. Here are 4 elections in frontier market countries that investors should watch out for in 2015:
Sri Lanka Presidential Elections – January 2015
Sri Lanka held the first presidential elections of 2015 and the result was a surprise; the incumbent Sri Lanka Freedom Party led by Mahinda Rajapaksa lost in a tight race to the New Democratic Front, led by Maithripala Sirisena. It was a shock because Rajapaksa actually called the election two years early, believing he was a certainty to win (a strategy that had worked before). Not only was he credited with ending the civil war in 2009, but Sri Lanka was one of the faster growing countries in the world with a GDP rate of above 7%.
Nonetheless it is clear that the people of Sri Lanka were wary of creating an authoritarian state with Rajapaksa at the helm. On the one hand, it is a clear win for democracy in Sri Lanka, and for the views of the minority Tamil and Muslim communities. On the other hand, Sri Lanka is in a positive economic trend and there is still fear over whether Rajapaksa will relinquish control quietly.
The Colombo Stock Exchange All Share Price Index rallied following the election but has come off since then, resulting in a market that has roughly been flat since the election. Given the uncertainty and political landmines that need to be navigated by Sirisena in the meantime, it is worth monitoring how Sri Lanka progresses in 2015.
Nigerian General Election – February 2015
Nigeria is a country facing both political and economic turmoil, which we touched on last week. With presidential, parlimentary, and state elections being held on February 14, the region looks to be getting more volatile.
In a nation plagued by Boko Haram and a history of violence in previous elections, it is disheartening that reports are saying that “in 2015, risks of violence are particularly high”. Religious tension is also high with Goodluck Jonathan running for a second term.
Nigeria’s stock exchange’s fall has been well documented, and these elections are unlikely to provide relief anytime soon.
Egyptian Parliamentary Elections – March to April 2015
Egypt has come a long way since the revolution in 2011 and the ousting of Mubarak. They have also not had a parliament since June 2012, so the upcoming elections being held starting in March and ending in April are being awaited with great anticipation.
While there has been grumbling about less personal freedom since Sisi helped overthrow Mursi, the impact on the stock market has been unambiguous. The EGX 30 has rallied over 70% in local currency terms since the end of July 2013 when Mursi was ousted.
Given how well the presidential election of Mursi ended, we would be more cautious and to temper expectations regarding these coming elections. Given the huge move higher in the local stock market, there may even be more downside risk since a disruption to the status quo could be detrimental. However, having a functioning parliament and the resulting political stability would be a step in the right direction long-term.
Argentine General Election – October 2015
Argentina is in for a big change in 2015 when Cristina Fernandez leaves the presidential office after 8 years in power. Since she is no longer planning to amend the constitution and go for a third term, the field is open and there are new candidates still emerging.
The economy is suffering right now and any investment into Argentina is overshadowed by the legal proceedings ongoing over its default in July 2014. With inflation estimated at over 40%, the currency market is in shambles with a full-blown black market operating in the open. While the official exchange rate for the peso has been stable just above 8.50 per USD, the “Dólar Blue”, the unofficial black market exchange rate, is currently above 13.50 per USD, an almost 60% gap!
Since the sad state of the economy is the biggest issue in Argentina at the moment, it is no surprise that all the front runners in the upcoming election are considered business friendly. While the impact they can make immediately is uncertain, the change in sentiment of a new political regime may prove positive. On the flipside, the appointment in October 2014 of Alejandro Vanoli as the new central bank chief was not well received by markets with both stocks and bonds losing value after his appointment. It remains to be seen whether anyone can reverse Argentina’s economic situation, but the new government will be elected with a mandate to try their best.