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Mexico, South Africa and India deliver political punch to markets

Marc Jones, 06/05/24

LONDON (Reuters) - A clobbering for South Africa's, Mexico's and even India's heavyweight markets in recent days has proved without doubt that politics can still deliver an unexpected uppercut in big emerging economies.

Mexico's peso and South Africa's rand were both still sliding on Tuesday following their respective election surprises, while the likelihood that Narendra Modi hadn't scored a landslide win in India's marathon elections sent its equity markets sprawling.

The peso fell 1.5% to just shy of 18 to the U.S. dollar at one point as traders continued to fret about the ramifications of the resounding win for the Claudia Sheinbaum-led MORENA party and its allies in Sunday's Mexican election.

That took its drop in recent days to nearly 5% and means that June is currently on track to be the peso's worst month since a 17% plunge at the start of the COVID-19 pandemic in March 2020.

South Africa's rand, which has also been hit by the prospect of a potentially fraught coalition government after a poor election showing from the ruling ANC party, fell another 1.3% too, to take its fall over the last week to around 3.5%.

"This is all a reminder of the importance of political risk events," said Graham Stock, a senior emerging market sovereign strategist at RBC Bluebay Asset Management.

"You go into these events with a base case, but if you underestimate the tails and they materialise, then it is going to surprise market participants."

Taiwan, Pakistan, Indonesia, Russia, Turkey have all held important elections this year but this week's trio have triggered the most dramatic market reactions so far.

Indian shares swooned almost 6% on Tuesday in what was their heaviest fall since the COVID rout - a move all the more jarring after they had hit record highs on Monday.

With over half the votes counted from an election that began back in April, Prime Minister Modi looked set to lose his majority, raising questions whether the new alliance he spearheads will need to spend more on welfare measures rather than key infrastructure projects and reforms.

Analysts at brokerage Emkay Global said that difficult but potentially beneficial changes to land and labour policies, along with privatisation of some of India's big state-run firms, were now "off the table".

WHIPLASH

The jitters had also pushed up India's government borrowing costs in the bond markets, while the rupee dropped 0.5% against the dollar which, although not seismic, was its biggest fall in 16 months.

"The India stock market reaction today was the classic whiplash where people got overexcited," said Ashmore's Head of Research, Gustavo Medeiros, referring to the recent record highs.

International investors have been buying into both India and Mexico over the last year or two as an alternative to China, meaning that they had been susceptible to a selloff, he added. But he said it was reassuring that there had been no real EM-wide "contagion".

In terms of Mexico, he cautioned that the "window of most concern" could still be ahead, however.

Come September, outgoing president Andres Manuel Lopez Obrador will be in his last weeks of power and could try to use MORENA's new "super majority" to ram through previously rejected constitutional changes.

The election campaign in the neighbouring U.S. will also be ramping up and Kieran Curtis, who heads EM local currency debt for EM-focused fund manager abrdn, thinks that is now the big crunch vote to watch for in analysing emerging markets.

With the unpredictable Donald Trump promising harsh new trade tariffs and strong anti-China, U.S.-first policies as well as other shake-ups if he regains power, it will be crucial.

Curtis said that with most of the big EM elections now complete, the U.S. was the crucial vote to watch, noting that as it will be highly populist and had some major underlying debt issues, the contest had certain EM-like characteristics itself.

"That is going to be the one that everybody really watches after this month," he said.


(Reporting by Marc Jones, editing by Karin Strohecker)

Why India's Modi failed to win outright majority

Soutik Biswas, 06/05/24

Indian PM Narendra Modi has won a third consecutive term in a much tighter general election than anticipated.

His Bharatiya Janata Party (BJP) looks set to fall short of a majority and is leading in the 543-seat parliament, below the required 272 seats. However its coalition partners have gained additional seats.

The results are a personal blow to Mr Modi, who has always secured majorities in elections as both chief minister of Gujarat state and India’s prime minister, and dominated the country's politics for a decade.

The verdict marks a surprising revival for the Congress Party-led INDIA opposition alliance, defying earlier predictions of its decline, and sharply diverging from both exit polls and pre-election surveys.

More than 640 million people voted in a marathon seven-week election, hailed as a "world record" by election authorities. Nearly half of the voters were women.

Many world leaders have crawled across the finishing line in their third term elections and Mr Modi is no exception. The BJP remains India’s single largest party by seats, and if Mr Modi secures a third term with his allies, the prime minister matches the record of Jawaharlal Nehru, India’s first premier.

But the significant loss of seats for his party - more than 50 - dims the allure of a third term, especially given Mr Modi's campaign targeting 400 coalition seats, making anything less seem like an under-achievement.

This has led to jubilation in the Congress camp and some despair in BJP quarters. Despite the BJP emerging as the single largest party, the burden of hype and expectations has left many of their supporters disheartened.

Mr Modi's supporters believe securing a third term can be attributed to several factors: a record of stable governance, the appeal of continuity, efficient welfare programmes, and the perception that he has enhanced India's global image.

To his Hindu nationalist base, Mr Modi delivered on key manifesto promises: revoking the autonomy of Indian-administered Kashmir, building the Ram temple in Ayodhya and implementing a controversial citizenship law. Many BJP-ruled states have implemented laws tightening regulations on interfaith marriages.

The BJP's significant drop in seats may be linked to joblessness, rising prices, growing inequality and a controversial army recruitment reform, among other things. Mr Modi's harsh and divisive campaign, particularly targeting Muslims, could also have alienated voters in some regions.

His ambitious slogan "Ab ki baar, 400 paar," aiming for more than 400 seats for his NDA alliance, may have backfired, with such a massive majority raising fears of constitutional changes among the poor.

Mr Modi’s party faced its largest setback in Uttar Pradesh (UP), a state larger than the United Kingdom and three times as populous. With 80 parliamentary seats, UP holds significant sway in national politics - many consider it the gateway to Delhi. Both Mr Modi and Rahul Gandhi hold seats there.

So what are the main takeaways of this election?

A dent of Brand Modi

Mr Modi’s popularity has been also attributed to his mastery of branding, transforming routine events into spectacles and astute messaging. A weak opposition and a largely friendly media also helped him build his brand.

The election results show that Brand Modi has lost some of its shine, indicating that even Mr Modi is susceptible to anti-incumbency. In other words, he is not as invincible as many of his supporters believed. This offers renewed hope to the opposition.

A return to coalition politics

India has a history of chaotic coalition governments, although some in the early 1990s and 2000s played a significant role in implementing economic reforms.

If the BJP forms the government, it will be dependent on allies and will need to adopt a more consultative and deliberative approach.

This dependency makes it vulnerable to collapse if allies feel neglected. The party, once perceived as all-powerful, is now reliant on allies, unlike in 2014 and 2019.

A jolt to the dominant BJP

Mr Modi's uninterrupted decade-long reign at the top has underscored India's embrace of what some political scientists term the one-party dominant system.

This has five key traits: a charismatic leader, unrivaled control over resources and communication, unmatched organisational machinery, and an opposition in disarray. Shrinking freedoms also characterise a one-party dominant system.

A scientist, a leftist and a former Mexico City mayor. Who is Claudia Sheinbaum?